iShares, the exchange-traded funds (ETF) platform of BlackRock, has expanded its fixed income ETF line-up with the launch of the iShares $ Corporate Bond Interest Rate Hedged UCITS ETF (LQDH) and iShares £ Corporate Bond Interest Rate Hedged UCITS ETF (SLXH) on the London Stock Exchange.
The new funds will appeal to investors seeking to insulate their portfolios from uncertainty around central bank monetary policy. (© Adrian Pingstone)
The funds provide exposure to corporate bonds whilst mitigating interest rate risk by selling government bond futures so as to achieve an approximate portfolio duration of zero (duration is a measure of the sensitivity of a bond to a change in interest rates).
The funds are physically replicated and designed to cater for those investors who want to obtain additional yield via corporate bonds, but are concerned about the impact of rising interest rates at a time when uncertainty around central bank monetary policy has seen volatility in yields increase.
The dollar-denominated fund, LQDH, is linked to the Markit iBoxx USD Liquid Investment Grade Index. This index is designed to provide a balanced and highly liquid representation of the USD investment-grade corporate market. The interest rate hedge is achieved by selling US Treasury bond futures.
The sterling-denominated fund, SLXH, is linked to the Markit iBoxx GBP Liquid Corporates Large Cap Index, an index consisting of liquid GBP investment grade corporate bonds selected to provide a balanced representation of the broad GBP investment-grade corporate bond universe. The interest hedge for this fund is achieved by selling 10-year UK gilt futures.
The interest rate hedging technique employed by the two funds aims to reduce exposure to parallel shifts in the interest rate curve of the government bond market they are referenced to. No adjustments are made to the hedge during the month to account for price movements of securities of the index.
Commenting on the launch, Tom Fekete, Head of Product Development for iShares in EMEA, said: “Investors remain interested in high-quality corporate bonds as fundamentals are supportive and yields start to look more interesting. However, corporate bond investors take on the risk that the value of their bonds will fall as yields rise.”
He continued: “The new funds aim to mitigate interest rate risk and enable investors to access the performance of corporate bonds in a single cost-efficient trade. We hope to expand this product suite further to give investors more choice in the way they manage interest rate risk and to meet the significant long-term demand for fixed income ETFs.”
The funds have total expense ratios of 0.25% and come on the back of the successful launch of the iShares Euro Corporate Bond Interest Rate Hedged UCITS ETF (IRCP) in October last year. This fund, which has grown to more €280 million in assets, provides exposure to euro-denominated corporate bonds and hedges interest rate risk by selling German bund futures.