BlackRock has launched a new fixed income ETF that seeks to outperform the US dollar-denominated bond market through a factor-driven or so-called smart beta selection approach.
The ETF seeks to outperform the broad US dollar bond market through a smart beta selection approach.
The iShares USD Bond Factor ETF (USBF US) has been listed on Nasdaq and comes to market with $20 million in assets under management.
The fund tracks the proprietary BlackRock USD Bond Factor Index which selects its constituents from a broad universe of Treasury bonds, investment-grade and high-yield corporate bonds, mortgage-backed securities (MBS), commercial MBS, and asset-backed securities.
The index aims to deliver enhanced performance through balanced sources of returns while retaining similar risk characteristics relative to the parent universe.
It does this by maximizing risk premia from macroeconomic, value, and quality factors through three separate processes: a macro timing signal, a macro factor tilt, and a style factor security selection approach.
The macro timing signal categorizes the current economic regime into one of four groups based on an evaluation of the expected default loss rate and spread momentum of the high-yield corporate bond segment. The type of economic regime determines the weights of the index’s high-yield and MBS segments as well as its target option-adjusted duration and duration times spread (a measure of the credit volatility of corporate bonds).
The macro factor tilt maximizes carry and rolldown while maintaining option-adjusted duration neutrality and duration times spread neutrality relative to the parent universe. To achieve this, the index uses an optimization process to dynamically allocate weights between the short-term investment-grade corporate bond segment, the mid-term investment-grade corporate bond segment, and the mid to long-term Treasury bond segment.
Finally, the style factor security selection process targets the value factor when selecting and weighting Treasury bonds, and targets value and quality factors when selecting and weighting corporate bonds.
The index is rebalanced on a monthly basis.
The ETF is priced with an expense ratio of 0.18%. Distributions are made on a monthly basis.
Karen Schenone, Head of iShares US Fixed Income Strategy within BlackRock’s Global Fixed Income Group, said: “Historically low yields heighten the importance of broadening potential sources of fixed income returns. USBF systematically looks at all types of bonds – investment-grade corporate debt, Treasuries, high-yield bonds, and mortgage-backed securities – to adjust its holdings based on various risk-on and risk-off macroeconomic environments, offering an opportunity to place a dynamic bond allocation at the core of your portfolio.”
Andrew Ang, Head of Factor Investing Strategies at BlackRock, added: “Using macro and style factors for US core fixed income assets can provide distinct and complementary sources of returns. Leveraging the powerful technology of BlackRock’s Systematic Fixed Income platform, USBF’s investment strategy harvests the value factor to identify underpriced securities, while using the quality factor to uncover the investment-grade and high-yield corporate bonds that exhibit lower probabilities of default. We believe this can be a possible winning alternative to broad-based debt market exposures.”