RETHINK FIXED INCOME WITH ETFs

The role of fixed income in portfolios is evolving. It’s time to re-think outdated approaches and discover the bigger role for fixed income ETFs in portfolios.

Summary

  • The Covid-19 crisis has been the ultimate test of investors’ portfolios, both placing a spotlight on and accelerating, challenges investors face when allocating to fixed income and compelling many to rethink their fixed income allocation.
  • Increasingly, investors are focusing on investment outcomes and utilising fixed income ETFs to drive portfolio efficiencies and overall portfolio resilience through diversification.
  • Fixed income ETFs offer efficient, diversified building blocks which provide greater transparency and clarity of portfolio risks. The liquid, flexible nature of fixed income ETFs enables investors to be nimble and stay adaptable with their implementation.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Challenges in fixed income are prompting change

The role of fixed income in portfolios is evolving. As investors face increasing pressure to deliver returns, generate yield and maintain diversification, the need to move beyond the outdated “active first and only” fixed income approach is clearly illuminated.

It's time to focus on better portfolio outcomes

More and more investors are taking a holistic portfolio construction approach, blending indexing and alpha-seeking strategies rather than defaulting to one or the other. By using all the "tools in the toolbox" investors can focus on the role of fixed income in their portfolios, the intended outcomes and goals.

There’s a bigger role for fixed income ETFs in today’s portfolios

As investors seek to address the strategic portfolio construction challenges they face, we see more and more investors using fixed income ETFs.

For fixed income, indexing has the power to transform the fragmented bond market into standardised, predictable and efficient exposures and greatly simplify portfolio construction. Indexing can drive more cost, risk and time efficiencies by lowering overall portfolio costs, improving transparency to help control and manage risks and minimising the need to monitor and review managers.

Risk: There can be no guarantee that the investment strategy can be successful and the value of investments may go down as well as up.

4 ways fixed income ETFs could help investors solve today’s bond market challenges

  • As yield becomes increasingly scarce, investors are allocating to riskier asset classes, with corporates, high yield and emerging market debt making up 40% of fixed income allocations in multi-asset portfolios. These asset classes tend to have a higher correlation to equity markets – in particular, during market downturns - which reduces the diversification benefits fixed income can bring to multi-asset portfolios.

    Investors need:

    • Greater transparency and clarity on portfolio exposures and risks in fixed income
    • Efficient building blocks which can bring resilience to the core of their fixed income allocation through diversification

    How can fixed income ETFs help?

    Indexing offers access to over 25,000 bonds with one trade. Investors could achieve cost-effective diversification, improved portfolio resilience through diversification and achieve time efficiencies by placing indexing at the core of their fixed income allocation. Fixed income ETFs can serve as both broad and precise building blocks and reach almost every part of fixed income markets including:

    • Core fixed income building blocks
    • Sustainable fixed income building blocks
    • Specific duration and credit quality buckets
    • Access to emerging markets

    Risk: Diversification and asset allocation may not fully protect you from market risk.

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  • With foreign exchange forming the second largest risk in multi-asset portfolios (after equity risk), many investors have been stung by holding unhedged allocations which were hit by strong currency moves.1

    Investors need the flexibility to hedge currency risks.

    How can fixed income ETFs help?

    Across our entire fixed income ETF range of both broad and precise building blocks including:

    • Core
    • Sustainable
    • Specific duration and credit quality buckets
    • Access to emerging markets

    Multiple currency hedged share classes are available across our range.

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  • 2020 was a stress test for all investor’s portfolios and as market volatility soared in March 2020, many investors discovered their fixed income allocations were not able to offer the liquidity, price discovery and flexibility they needed to be able to de-risk as markets sold off.

    Investors need nimble, liquid fixed income exposures which remain resilient when markets get volatile.

    How can fixed income ETFs help?

    Fixed income ETFs allowed investors to be nimble and tactical with asset allocation even in the face of extreme volatility. This allows investors to quickly price whole sections of the market and make informed decisions on a real-time basis – rather than waiting for the end of day as is custom with traditional mutual funds.

    Risk: Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

    FIXED INCOME ETFs IN VOLATILE MARKETS >

  • Investors are under increasing pressure to transition portfolios to be more sustainable across both equities and fixed income. With 2019 seeing a 13% increase in allocations to sustainable fixed income, more and more investors are looking for ways to navigate this part of the fixed income market.

    Investors need a transparent and scalable approach to sustainable fixed income implementation.

    How can fixed income ETFs help?

    With a full range of sustainable fixed income building blocks, investors are able to use sustainable fixed income ETFs to achieve similar risk return characteristics while improving the sustainability profile of that exposure. An indexed approach to sustainable fixed income allows for full attribution and transparency through a rules-based methodology.

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DOWNLOAD OUR WHITEPAPER ON BUILDING BETTER PORTFOLIOS WITH INDEXED FIXED INCOME >

1 Source: Portfolio Insights (2020 Edition), BlackRock - January 2020.

Risk: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy.

WHY iSHARES FOR FIXED INCOME?

Range

Access & breadth of range

iShares has the largest fixed income UCITS ETF range with over 90 funds offering access to virtually all parts of the fixed income markets.*

Quality

Product quality

iShares offer tight tracking and the most liquid UCITS ETFs in Europe. Rigorous product construction and index selection ensure quality range.*

Expertise

Dedicated partner

Access to our global leading trading and implementation services, portfolio analytics and solutions and model portfolios.

* Source: BlackRock, Bloomberg as of 31 August 2020.

Risk: Two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to repay the principal and make interest payments. There is no guarantee that a positive investment outcome will be achieved.