iShares launches global bond ETF as demand soars

Corporate bonds continue to be popular among investors, with the Investment Management Association, the trade body representing the UK investment management industry, reporting that investors are piling into actively managed corporate bond funds. But passive options for exposure to corporate bonds are also increasing, the latest addition being the iShares Global Corporate Bond ETF (ticker: IE).

This is the first global corporate bond ETF available to European investors and comes at a time when demand for fixed-income assets is soaring. Flows into fixed-income ETFs have almost doubled in 2012, with $50.8bn of net new assets recorded in the first eight months, compared with $28.5bn in the same period in 2011, according to BlackRock's ETP Landscape research.

"With clients continuing to search far and wide for yield in their portfolios, they need to consider allocating to global credit," said Alex Claringbull, senior fixed-income portfolio manager at BlackRock. "This new ETF gives investors unparalleled access to the global corporate bond market in a single investment."

The ETF aims to track the Barclays Global Aggregate Corporate Bond Index, a broad-based measure of global investment-grade fixed-rate corporate debt markets. The ETF will trade across more than 7,000 high-quality corporate bonds mainly from the US (48 per cent), Europe (23 per cent) and Asia Pacific (10 per cent), denominated in 15 currencies. On top of potential capital gains, the fund pays a dividend to investors twice a year.

iShares Global Corporate Bond ETF is physically backed, buying its underlying bonds and securities rather than getting the index's returns via a swap. But it does not hold all the bonds in the index, instead holding a sample of around 270 bonds which will increase to a typical holding of around 500. Barclays Global Aggregate Corporate Bond Index has in excess of 7,200 bonds.

iShares says this optimisation strategy reduces trading costs and volatility resulting in closer tracking of the index: "In some cases, when it is not considered cost-effective to buy all of the securities in the index, for example, with very broad indices that have a large number of constituents or those tracking illiquid securities, an optimisation approach is used."

The ETF may also invest in government bonds with the intention of obtaining a similar performance with matching risk profile to certain constituents of the ETF's benchmark index. For example, the fund's top 10 holdings at time of writing included four Japan government bonds.

The costs of bond ETFs such as the iShares Global Corporate Bond ETF which has a total expense ratio (TER) of 0.2 per cent are very low relative to active bond funds, and as bonds tend to make lower returns than equities this is a good area to keep charges at a minimum. Actively managed strategic bond funds, for example, typically have a TER of between 1 and 1.5 per cent.

Active advocates

However some argue that active management is better in the case of bonds. Whereas the largest components in an equity index are typically the stronger companies, hence their size, in a bond index the dominant names may be among the more indebted countries or companies and not necessarily the best credits. A passive approach can be more volatile than an active fund seeking to mitigate downside, and active bond fund managers argue that this market is too complex to invest in passively.

"The vast majority of our fixed-income exposure is via active managers," says Edward Allen, partner at wealth manager Thurleigh Investment Managers, which uses ETFs extensively for asset allocation. "We think this is an area where active is better, particularly when it comes to macro choices on credit duration and the ability to add value. However, we use fixed-income ETFs from time to time as they are useful in aggregating a large and difficult-to-access area, and are a simple and cheap way to get exposure to this. You also know exactly what you are buying, which is not the case with an active fund."

Many advisers currently favour strategic bond funds because their managers have the flexibility to move between all kinds of bonds, enabling them to avoid risk and seize opportunities.

There are three strategic bond funds in our IC Top 100 Funds list - Legal & General Dynamic Bond Trust, Henderson Strategic Bond and M&G Optimal Income.

Source: Barclays