iShares, the exchange-traded funds (ETF) platform of BlackRock, has announced the launch of the iShares Global Government AAA-AA Capped Bond Fund (SAAA), the first ETF to offer global AAA/AA-rated government bond exposure.
The iShares Global Government AAA-AA Capped Bond ETF is the first to offer global top-rated government bond exposure.
The fund is benchmarked to the Barclays Global Government AAA-AA Capped Bond Index and comes with a total expense ratio (TER) of just 0.20%.
Listed on the London Stock Exchange, the fund invests in fixed-rate local-currency bonds issued by developed countries worldwide, which are rated AA (or equivalent) or higher using the median of ratings given by three leading credit-rating agencies, Fitch, Moody’s and S&P.
By targeting AAA/AA-rated debt, the fund will likely appeal to investors who are increasingly concerned with government bond risk, particularly in the Eurozone, and are searching for high-quality government debt with global diversification.
By having a global remit, the new iShares fund could offer an alternative to Deutsche Bank’s db x-trackers II iBoxx € Sovereigns Eurozone AAA Total Return Index ETF (XBAT) and Amundi’s Amundi ETF Govt Bond Highest Rated EuroMTS Investment Grade (AM3A), both of which focus only on Eurozone AAA-rated government bonds.
With ongoing investor demand for so-called safe-haven assets, the fund’s AAA/AA mandate is likely to be reassuring. S&P defines an AAA issuer as having “extremely strong capacity to meet financial commitments”, while Moody’s says “obligations rated Aaa are judged to be of the highest quality, with minimal credit risk”. Similarly, AA-rated issuers have a “very strong capacity to meet financial commitments”, according to S&P, while Moody’s judges them to be of “high quality” and “subject to very low credit risk”.
The fund tracks its benchmark, the Barclays Global Government AAA-AA Capped Bond Index, by using an optimised physical-replication methodology. This means that the fund holds actual underlying index constituents (i.e. global AAA and AA-rated government bonds) but not necessarily all of them or at their exact index weight. The reason for this is that it is not always possible or advisable to replicate the underlying index in full, as some indices include securities that have insufficient liquidity or cannot be easily accessed. This may make full replication inefficient or even impossible.
In cases such as this, an optimised approach is preferable. In this approach, a reduced but representative sample of securities is used to replicate the characteristics of the index as closely as possible, excluding those securities that are illiquid, unobtainable or otherwise inefficient to hold. iShares has a strong record in this field and is generally pretty good at keeping tracking error (a measure of how closely a portfolio follows the index) low.
To ensure diversification, the index includes caps so that no AAA-rated country accounts for more than 20% of the fund and no AA-rated country accounts for more than 10%. As at 31 August 2012, the index contained bonds issued by 19 countries denominated in 13 currencies. On a country basis, 20.0% of the index was allocated to the US, 18.6% to the UK, 14.6% to France, 13.5% to Germany, 10.0% to Japan, 4.5% to Canada, 4.0% to Belgium, 3.9% to Netherlands, 2.7% to Austria and 2.4% to Australia. The remaining 6% or so was allocated among nine other countries ranging from Denmark with 1.4%, to Hong Kong with less than 0.1%. Overall, the index had a yield to maturity of approximately 1.2% and a modified duration of 7.3%.
Commenting on the launch, Alex Claringbull, senior fixed income portfolio manager, said: “Today’s launch recognises the challenges investors now face with a decreasing number of highly rated government bond issuers available. By designing this global product, including issuers such as the Nordic countries, Australia and Singapore, we are offering access to some of the highest quality government-issued bonds throughout the global economy in one single, cost efficient, fund.”
Claringbull added: “This fund is the twelfth fixed income ETF we have launched in Europe this year. We will continue to build out our range so that investors can select the exposure that best fits their needs and tailor their bond allocations by geography, currency and rating.”
Globally, iShares now offers a total of 56 fixed income ETF products providing exposure to a range geographies, classes, segments and issuers. Twenty-two of these products are listed on the London Stock Exchange.
The fund is eligible for ISAs and SIPPs. It is seeking UK Reporting Status.