TAKE THE HIGH ROAD WITH HIGH YIELD

Take the high road with High Yield

“Trump trades” have taken centre stage post-elections, and with potentially lower tax rates, easing regulations, and reduced uncertainty all likely tailwinds for risk assets, investors piled into risk across asset classes. In the strongest month of flows since July, iShares high yield ETFs netted USD 2.6B last month (Figure 1). At the same time, positive US economic performance and strong corporate fundamentals mean that tighter spreads may be justified, and alongside still attractive all-in yields, opportunities in high yield remain in focus.

Amidst a volatile rate environment this year, credit spreads have continued to steadily tighten. Spread assets have outperformed duration assets year-to-date (Figure 2), with high yield in particular seeing among the strongest performance across all fixed income sectors, as investors look to harvest attractive income.

The evolving high yield ETF toolkit today

From just one high yield ETF globally when iShares launched the industry’s first in 2007, the high yield landscape now houses nearly 200 ETFs. High yield ETF AUM has grown at a rapid pace of ~40%, comprising almost 25% of the total AUM of high yield funds. There are many ways to play in the high yield space, from liquid, core high yield ETFs, to new exposures e.g. BuyWrite ETFs using covered call options, interest rate hedged ETFs, target maturity ETFs, as well as alpha-seeking ETFs. With the US high yield ETF toolkit available today offering greater granularity, investors can be nimble and precise just within their high yield allocation.

No Time to Yield

A case for putting cash to work with bond ETFs

Last year, our whitepaper “The Great Yield Reset” discussed the generational opportunity for investors to rethink their portfolios with a greater focus on fixed income.

In our latest paper “No Time to Yield”, we highlight our updated expectation that global bond ETFs will reach US$6 trillion in AUM by 2030. We discuss the opportunity within bonds and why investors may want to consider moving now to capture decades high yields, get cash off the sidelines, and employ efficient, precise tools such as bond ETFs in this new market regime.

As investors take a more dynamic approach to asset allocation, we believe bond ETFs are among the most powerful tools within the investor tool kit to navigate this market environment.

The timing of potential interest rate cuts may be uneven worldwide, but the message is clear: Don’t wait.

Source: BlackRock, “No Time to Yield”, as of April 2024. There is no guarantee that any forecasts made will come to pass.

Key themes we discuss in this piece:

1. Time to put cash to work and capture higher rates Yields are higher today than they have been in years. If inflation indicators continue to fall, the time of elevated cash rates may be drawing to a close.
2. Investors are choosing bond ETFs in record numbers, but they have room to do more Many investors are still significantly underweight to fixed income, with a 22% average allocation, based on total global industry AUM, far below the “60/40” portfolio allocation often referenced in balanced portfolio discussions.
3. Now is the time to move Even with ongoing volatility in economic data and bond markets, we believe it’s time for investors to move because, historically, the market has tended to price in rate actions before they occur.

Index Your Bonds with Asia Credit

Asia bond markets definitely have a part to play in the next leg of growth in index and ETF adoption. As investors continue to move beyond the “active versus passive” debate, constant product innovation will offer increasingly precise sources of potential returns, and help lead more investors to embrace bond index building blocks alongside high conviction active strategies in pursuit of optimal portfolio outcomes.

In this Asia-focused “Index Your Bonds” paper, we spotlight iShares Asia Credit exposures, provide insights on how they are managed in practice, and discuss how innovations such as ESG integration will make indexing an integral part of investing in Asia fixed income.