Rising rates and de-risking drive fixed income ETF flows, finds BlackRock

Jul 23rd, 2018 | By | Category: Fixed Income

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BlackRock, the asset management giant behind the iShares range of ETFs, has pointed to rising interest rates and de-risking as two big drivers of fixed income trade activity during Q2 2018.

Brett Olson, head of iShares EMEA fixed income

Brett Olson, head of iShares EMEA fixed income.

Preparing for rising rates

Brett Olson, head of iShares EMEA fixed income, commented, “Following greater clarity from the Fed, investors are using ETFs to position portfolios for rising rates. Floating rate bond ETFs proved to be a popular solution for investors globally.”

The iShares $ Floating Rate Bond UCITS ETF (FLOT LN) gathered $297 million in net assets under management during Q2 2018.

Launched in July 2017, FLOT tracks the Bloomberg Barclays US Floating Rate Note < 5 Years Index which provides exposure to US dollar-denominated floating rate bonds issued globally.

While portfolios containing traditional (non-floating) bonds are susceptible to losing value in response to rising interest rates, floating rate bonds typically do not respond the same way. This can be seen by FLOT’s current effective duration of 0.14 years, indicating that a 1% parallel rise in interest rates would only result in a 0.14% decline in the ETF’s value, not accounting for convexity effects.

FLOT comes with a total expense ratio (TER) of 0.10% and currently has AUM of $680m.

More recently, BlackRock introduced the iShares Euro FRN UCITS ETF (EFRN LN). The fund tracks the Bloomberg Barclays EUR FRN Corporate 2% Issuer Cap Bond Index, providing access to euro-denominated EURIBOR floaters. The ETF may suit investors who are concerned over the impact of interest rate rises from the European Central Bank. Its effective duration is 0.22 years.

Since launch, EFRN has accumulated €22m in AUM. Its TER is also 0.10%.

De-risking during the Italian turmoil

Flow data suggests that investors used high-yield ETFs, which contain significant exposure to Italian assets, to manage risk in their portfolios in the wake of the Italian election and formation of a new coalition government.

For example, BlackRock notes that secondary daily trading volume on the iShares € High Yield Corp Bond UCITS ETF spiked to €621m in the final week of May compared to the year-to-date average of €321m.

“In contrast, government bond ETFs are the top inflow category this year due to equity market volatility, concerns about the credit cycle and the desire to shorten portfolio duration, with the bulk of inflows seen in US treasury ETFs,” said Olson.

The flows into bond ETFs, both globally and into BlackRock’s US- and EMEA-listed product suite, are outlined in the table below:

Source: BlackRock.

The MiFID II effect

MiFID II, the package of comprehensive Europe-wide rules designed to strengthen protection for investors and improve transparency, was formerly enacted at the beginning of 2018.

Between January and June this year, BlackRock reports that 74% more trading on the iShares UCITS bond ETF range was visible – where it would not have been before MiFID II came into force. BlackRock’s top six most traded iShares bond ETFs in EMEA saw $70bn in trading volume over Q2 2018.

“This new visibility is helping investors become comfortable that the industry is big and liquid enough to be an efficient way to invest,” said Olson.

ESG is the emerging trend

BlackRock also notes that fixed income investors are increasingly looking to integrate ESG standards into their portfolios. The asset manager highlights a report from UN-supported Principles for Responsible Investment, published in April, which said that “with the global bond market worth more than $120 trillion, bondholders have the potential to become a major force in responsible investing.”

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