iShares has launched the iShares Barclays Capital Euro Corporate Bond Interest Rate Hedged (IRCP) fund, the first ETF that offers physical corporate bond exposure and mitigated interest rate risk in a single fund.
In a very low yield environment, investors are increasingly seeking extra income by investing in corporate bonds. This product is designed to cater for those investors who want to obtain that extra yield but are concerned about what may happen to corporate bond prices if we move out of the current low yield environment.
Past performance of European corporate bonds has been strong, illustrated by the Barclays Euro Corporate Bond Index increasing 19.2 per cent in the past three years. This, however, can broadly be attributed to the performance of German government bonds, which make up approximately 14 per cent of the return, which represents the interest rate risk component of this index.
The yield of German government bonds has continued to fall throughout the European economic crisis due to their nature as a safe haven investment. It is now at a historic low. A potential future rise in German government bond yields could push up the corporate bond yield curve and ultimately lower corporate bond prices. This new ETF protects against such a potential upward shift by hedging out the inherent interest rate risk using German government bond futures. The ETF’s target duration is zero.
Alex Claringbull (pictured), senior fixed income portfolio manager for BlackRock’s iShares fixed income range, says: “This new fund buys physical corporate bonds, and sells German government bond futures against those purchases, offering isolated credit exposure that allows investors to earn the extra corporate bond yield they are seeking. It can also be a great way to protect your portfolio from any future rise in government bond yields. This fund is the 16th corporate bond iShares ETF in Europe. It extends our comprehensive range of funds enabling investors to select the corporate bond exposure that best fits their needs.”
iShares now offers 58 fixed income ETFs and continues to innovate and develop products to suit evolving investor demand for transparent bond solutions.
