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Friday, June 28, 2013

iShares Taps into Investor Bond Frustrations

Reported by Tommy Fernandez

Despite all the declarations that the market is experiencing a great rotation, there are still a number of investors who want fixed-income. And their desires are being frustrated by a severe lack of inventory in the markets.

This is creating an opportunity for BlackRock's iShares, which has launched, and is in the process of expanding, an ETF designed to mimic the behavior of bonds in investor portfolios.

The product line, dubbed iSharesBonds, was launched in April with four products: the iSharesBond 2016 Corporate ex-Financials Term ETF; the iSharesBond 2020 Corporate ex-Financials Term ETF; the iSharesBond 2018 Corporate ex-Financials Term ETF, and the iSharesBond 2023 Corporate ex-Financials Term ETF.

These four products include coverage in investment credit corporate bonds in all sectors but financial companies, for those firms that don't like to invest in debt tied to their sector.

BlackRock filed in May for SEC permission to launch four such products, but this time including coverage of the financial sector.

These products are meant to address a growing need amongst investors of all types who want at least some exposure to fixed-income, but are hard-pressed to find it, according to Matt Tucker, head of Fixed Income iShares Strategy at BlackRock. Since the financial crisis, he says, capital requirements have stymied firms that previously served as market makers in fixed income securities.

For example, Tucker notes that primary dealer inventories for corporate bonds reached $250 billion at the end of 2007. Now, it is more along the line of $60 billion, Tucker said.

"The amount of capital tied to providing liquidity for credit securities now has really shrunk the market. It has made it difficult for everyone--there are fewer bonds to purchase now," Tucker recently told MFWire.

To that end, the iSharesBonds ETFs are designed to mimic the behavior of fixed-income securities in a portfolio. For example, each ETF has a defined maturity just like a bond so investors can use them to target and manage interest rate risk just like individual bonds. However, they provide coverage of a broad diversified portfolio.

Tucker said that BlackRock is working on developing education programs to help clients work these ETFs into their portfolios.

Meanwhile, the fund giant will continue to research into expanding the product line, including potential coverage into Treasuries and municipals, among a few. 

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