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BlackRock Canada launches iShares Short Term Strategic Fixed Income ETF

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iShares has launched a new fund that seeks to generate income for unitholders by investing primarily in securities of one or more iShares ETFs that provide exposure to global fixed income securities.

This includes government bonds, investment grade corporate bonds, high yield securities, emerging market debt and other types of fixed income investments. Exposure to these types of fixed income investments may also be obtained by investing directly in them and/or through the use of derivatives.In constructing the portfolio of iShares Short Term Strategic Fixed Income ETF (XSI), BlackRock Canada intends to limit its exposure to interest rate risk by limiting average portfolio duration to five years or less. XSI has an annual management fee of 0.50%. XSI has now closed the initial offering of its units which will be available for trading on the TSX when the market opens today.

"With investors facing historically low yields and long duration in the broad Canadian bond universe – XSI brings to market BlackRock's global capabilities to provide a fixed income solution that controls both overall risk and specifically volatility in interest rates, yet meeting the income needs of investors," says Pat Chiefalo, Managing Director, Head of Product for BlackRock Canada's iShares business. "As a multi-ETF vehicle, XSI brings the best of BlackRock's global iShares platform to Canadian investors to help them in their search for yield."

XSI has been designed in response to the evolving landscape facing fixed income investors today. For several years, central banks around the world have kept fixed income yields low, but the average duration of bonds – the time it takes for the price of a bond to be repaid – has risen, driven by governments that have lengthened the maturity date of their debt instruments in order to lock in low interest rates. The result is that the spread between yield and duration is at historic highs: the average duration of the broad Canadian bond universe stands over seven years, while average yields are in the 2 to 3% range. If interest rates rise, returns from these long-duration bonds will be reduced.

Meanwhile, on the global level, investors are beginning to see interest rate policy divergence among central bankers after years of moving in lockstep. For example, while the US is widely expected to tighten monetary policy, Europe, Japan and Canada are adopting a more accommodative stance. Such divergence in interest rates may create both opportunities and volatility in the fixed income market – pointing to the advisability of mitigating interest rate sensitivity while looking beyond Canada's borders for yield.

"The era of stability in monetary policy and interest rates is drawing to a close, and in this new environment it makes sense for investors to consider fixed income assets with shorter durations while global forces play themselves out," says Aubrey Basdeo, Managing Director, Head of Canadian Fixed Income, BlackRock. "At the same time, yields in traditional domestic bond portfolios look poised to remain low, suggesting that investors may need to explore fixed income opportunities elsewhere to generate yield."

Structured as a "fund of funds", XSI leverages BlackRock's global iShares platform. XSI directly holds funds that provide exposure to both domestic and international iShares bond funds that Canadian investors might otherwise have difficulty accessing. The diversification capabilities of XSI allows for rebalancing of exposures as the fixed income landscape fluctuates, in order to continue to minimise interest rate sensitivity (as well as country-specific risk) and maximise opportunities for greater yield.

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