iShares, the exchange-traded funds arm of BlackRock Inc, has launched a “fund of funds” in an effort to offer investors decent returns in a low interest rate environment. The iShares Yield Optimized Bond ETF (BYLD) is the latest addition to its portfolio of bond ETFs and aims to solve the risk-reward conundrum.
With the Fed announcing in no uncertain terms that interest rates will remain low for an extended period of time, analysts expect yields to remain weak at least for this year. In such an environment, investors are likely to be left with two unattractive choices: invest in risky high-return/junk bonds or stay content with lower yields on higher-rated bonds.
The new fund tracks the Morningstar US Bond Market Yield-Optimized Index, a gauge comprised of seven ETFs that collectively seek to deliver superior income while maintaining long-term capital appreciation. Interestingly, all the ETFs included in the index are issued by iShares itself and targets various fixed-income categories including Treasuries, TIPS, investment-grade corporate or floating-rate bonds, mortgage backed securities, high yield debt and agency bonds.
To make the cut in the index, the underlying ETF must be at least a year old, have assets of more than $100 million and meet minimum liquidity requirements. The constituents span various duration, yield and risk spectrums, making it an interesting pick when rightly predicting the Fed’s interest rate agenda remains difficult.
Geographically, US fixed-income securities account for almost 72 percent of total weight with small weights assigned to other developed markets such as the Canada, Germany and the UK. Weights to the constituents are assigned based on a constrained mean-variance optimization formula to create a portfolio for optimized returns.
On each rebalance date, the index maintains a weight allocation of 0-50 percent for US Govt. Bonds, 0-50 percent securitized debts, 0-20 percent non-investment grade bonds and 0-10 percent investment grade/floating rate bonds.
The top three funds in the index include iShares MBS ETF (MBB), iShares iBoxx USD High Yield Corp Bond (HYG) and iShares Intermediate Credit Bond ETF (CIU). The effective duration of BYLD is 5.14 years with a weighted-average maturity of 6.78 years, suggesting the product targets the middle part of the yield curve and exhibits moderate interest rate risks.
The fund has an annual expense ratio of 0.28 percent.
Disclosure: No holdings