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A new toolkit for managing fixed income portfolios


toolkit The growing inefficiencies in the bond markets make shifting allocations increasingly difficult, forcing investors to look beyond over-the-counter (“OTC”) dealer model for their trading needs.

Bond ETFs are emerging as a portfolio management tool for institutions to navigate these trading challenges.

The liquidity of bond ETFs has grown substantially since they were introduced nearly 15 years ago. The maturation of this market has helped create a new source of on-exchange fixed income liquidity for investors beyond what is available in the OTC market.

In fact, the growth in trading volume of some of the largest bond ETFs appears to be part of a virtuous cycle driven by liquidity-challenged investors. As ETF trading volumes grow, they can accommodate larger trades, which precipitates even deeper level of liquidity.


A representative large $ Investment Grade Corporate Bond ETF AUM, volume and turnover A representative large $ High Yield Corporate Bond ETF AUM, volume
and turnover

1 Source: BlackRock, Bloomberg, as of 31 December 2016. Trading volume represents the cumulative annual trading volume of the ETF. Turnover rate represents annual trading volume as a percent of AUM. There can be no assurance that an active trading market for iShares of an ETF will develop or be maintained.

ETFs are frequently used as a tactical trading tool because they provide investors with the ability to gain exposure in a timely, cost-effective and efficient manner.

A investor took a tactical view on inflation by opening a position in the iShares $ TIPS UCITS ETF (ITIPS) when the market’s inflation expectations appeared to be low. The manager then closed the ETF position when inflation reverted back to its
long-term average.


10-year breakeven inflation rate1


1. Source: Federal Reserve Bank of St. Louis, as of 31 December 2016.
Case study shown for illustrative purposes only. This is not meant as a guarantee of any future result or experience.
This information should not be relied upon as research, investment advice or a recommendation regarding he iShares Funds or any security in particular.

Across global markets, yields are at historic lows. Nearly $8 trillion of global government bonds, or about 25% of the developed market bond universe, now carry a negative yield.1

Comparatively, the yield of emerging market sovereign debt is attractive but sourcing bonds in these markets can be complex. Investors often face challenges establishing local custodian or brokerage relationships, understanding and meeting local currency bond requirements, or navigating restrictive policies of many countries.

The on-exchange structure of bond ETFs provides diversified and liquid access to difficult-to-reach areas of the global bond market.


Global developed market government bonds by yield1

Sovereign debt yields, 2011-20162

1. Source: BlackRock Investment Institute, J.P. Morgan, Thomson Reuters, as of 31 December 2016. The chart is based on the J.P. Morgan Global Developed Bond Index. Areas show the proportion of bonds in the index with yields in each range.

2. Source: BlackRock Investment Institute, J.P. Morgan, Thomson Reuters, as of 31 December 2016. Emerging market (EM) local debt based on JP Morgan GBI Global Diversified Index, EM dollar debt based on JP Morgan EMBI Global Diversified Index. 10-yer sovereign yields based on Datastream benchmark indexes. Past performance does not guarantee future results.