BlackRock has launched the iShares USD Bond Factor ETF (NASDAQ: USBF) in the US.
The ETF offers investors a chance to outperform the broader U.S. fixed income market by selecting bonds based on macro and quality and value style factor insights. USBF, which seeks to track the BlackRock USD Bond Factor Index, has an expense ratio of 0.18 per cent, which as the firm points out means that the fee is USD1.80 for every USD1,000 invested –lower than 86 per cent of mutual funds and ETFs in the Morningstar Core Bond category.
The firm writes that many debt market participants are seeking to navigate credit risk – the ability to be repaid in full and on time – and interest rate risk, given how yields could rise after not only recent all-time lows, but also four consecutive decades of declines. By applying a rules-based, transparent factor, or ‘smart beta, investing lens to bonds, USBF pursues a strategy that seeks to provide a diversified selection of U.S. dollar-denominated bonds while enhancing total return relative to the broader U.S. fixed income market and retaining similar risk characteristics.
“Historically low yields heighten the importance of broadening potential sources of fixed income returns,” says Karen Schenone, Head of iShares US Fixed Income Strategy within BlackRock’s Global Fixed Income Group. “USBF follows an index that systematically looks at all types of bonds – investment grade corporate debt, Treasuries, high-yield bonds and mortgage-backed securities – to adjust its holdings based on various risk-on and risk-off macroeconomic environments, offering an opportunity to place a dynamic bond allocation at the core of your portfolio.”
Factors, like value, momentum, quality, and low volatility, have historically driven both investment risk and returns for asset classes like stocks and bonds.
“Using macro and style factors for U.S. core fixed income assets can provide distinct and complementary sources of returns,” says Andrew Ang, Head of Factor Investing Strategies at BlackRock. “Leveraging the powerful technology of BlackRock’s Systematic Fixed Income platform, USBF’s investment strategy harvests the value factor to identify underpriced securities, while using the quality factor to uncover the investment grade and high-yield corporate bonds that exhibit lower probabilities of default. We believe this can be a possible winning alternative to broad-based debt market exposures.”