How to barbell your bonds

IDEAS FOR LOW RATES

Record low yields demand lower fees and new return sources

When rates are low, avoid spending your fee budget on benchmark-hugging active funds. Learn how to barbell your bonds by anchoring your portfolio with low cost bond ETFs and allocating your fee budget to flexible and alternative active strategies.

In the past, you may have been able to give clients the stability they needed with one simple bond fund. But those days are over. In this low-rate world, you could be looking for a better way to help clients offset equity risk, preserve capital and seek income. One way to approach the current market environment is by barbelling your bonds.

This framework involves combining index and active exposures to help achieve better outcomes.

On the left side of the barbell, iShares bond ETFs offer diversified exposure to the broad market. As indexing tools, these funds help keep transparency high and fees low. The money you save in expenses can then be allocated to alternative or unconstrained active strategies on the right side of the barbell that target true alpha. This could give your clients a more precise and cost-effective portfolio.

And it can potentially keep their investments away from an inefficient middle ground, where they could be paying managers high fees just to hug benchmarks.

We know bonds have to work harder today to generate sufficient after-fee returns. By barbelling your bonds, you can help your clients’ bond portfolios stay strong.

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In this low low-rate world, you could be looking for a better way to help clients offset equity risk, preserve capital and seek income.

Dhruv Nagrath, Fixed Income Product Strategist

Build your barbell blends

When redesigning fixed income portfolios, investors can optimize their allocation for fees and yield by pairing flexible, active strategies alongside bond ETFs.

Keep fees low and transparency high

Investors increasingly recognize that the potential three benefits of ETFs—competitive performance, low cost and liquidity — apply to bonds just as they do to equities.

Get started with bond ETFs Get started with bond ETFs

Seek new sources of return with flexible, active strategies

BlackRock Strategic Income Opportunities Fund (BSIIX) can complement your core bond funds with a flexible strategy that diversifies you from interest rate volatility.

Read the BSIIX monthly commentary Read the BSIIX monthly commentary

Bonds don’t cushion market drops like they used to

Past performance does not guarantee future results.

Source: BlackRock, Bloomberg as of 3/31/21. U.S. recession periods are defined by National Bureau of Economic Research. Graph displays U.S. 10 10-Year Treasury Yield rate changes during recession periods. 10-Year Treasury change reflects the biggest move seen from as early as six months before the recession period.

During past stock market selloffs, core bond prices rallied as bond yields fell. But today, with yields close to zero, there’s not much room to fall and bonds will likely provide less generous returns for the next downturn.

Rethinking portfolio construction Rethinking portfolio construction

Bond yields are likely to remain at historic lows, which means that investors may need to redesign their portfolios. We advocate for a barbell approach when investing in today's bond market.

Read now Read now

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To obtain more information on the funds, including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month-end, please visit:

BlackRock Income Fund
BlackRock Strategic Income Opportunities Fund
BlackRock Strategic Municipal Opportunities Fund
BlackRock Systematic Multi-Strategy Fund

The Morningstar Rating^TM for funds, or "star rating," is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment of dividends and capital gains. Current performance may be lower or higher than that shown. Refer to blackrock.com for most recent month-end performance.