New iShares ETF Offers Inflation Hedge

New fund is first corporate bond ETF to hedge inflation exposure.

Today, BlackRock’s iShares division has rolled out an ETF that offers inflation-hedged exposure to the broad investment-grade corporate bond space. The iShares Inflation Hedged Corporate Bond ETF (LQDI) is designated as actively managed, but invests primarily in the $32 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), with the active aspect mainly coming into play with the inflation hedge.

LQDI lists on Cboe Global Markets, which is the parent company of ETF.com. The fund comes with an expense ratio of 0.20%, five basis points more than the expense ratio charged by LQD.

LQD With A Twist

“The fund offers investors an alternative way to access the corporate bond market while simultaneously protecting against unexpected inflation risk,” said Stephen Laipply, who heads the fixed-income strategy group for iShares in the U.S.

“It will effectively reduce exposure to inflation risk while also maintaining exposure to real interest rate and credit risk. You’re getting LQD but you’re protected against inflation going up beyond market expectations,” he added, noting also that LQDI represents the first diversified corporate exposure with inflation protection.

In addition to LQD, which is the largest investment-grade U.S. corporate bond ETF currently trading, the new ETF can also invest in other ETFs and securities covering investment-grade corporate bonds denominated in U.S. dollars. It affects the hedge primarily via an actively managed portfolio of inflation swaps, but can also invest in Treasury inflation-protected securities, Treasury futures and a variety of other types of swaps, according to the prospectus.

The document additionally notes that even in inflationary periods, LQDI could actually underperform relative to LQD. Laipply explains that investors in LQDI  and instruments like TIPS will be better off than those in LQD and nominal Treasurys if realized inflation exceeds market expectations.

Uptick In Inflation

With inflation expected to rise this year, investors are looking for ways to hedge its influence, particularly in fixed income.

“Inflation is damaging to fixed-income investors. You’re receiving a fixed coupon that doesn’t vary over time,” Laipply said. “To the extent that inflation increases—particularly above and beyond what the market has priced in—that’s going to erode returns for fixed-income investors.”

“The reason this launch is timely is that, for the first time in many years, inflation is finally normalizing, interest rates are normalizing, and there’s an expectation that inflation could continue to increase as the economy continues to grow,” he pointed out.

Laipply notes that LQDI is a complement to the rest of iShares’ inflation protection suite, which includes the $24.4 billion iShares TIPS Bond ETF (TIP) and the $1.8 billion iShares 0-5 Year TIPS Bond ETF (STIP). However, LQDI is the first ETF to offer this particular type of exposure, with average investors usually only having access to TIPS if they wanted to hedge inflation.

Contact Heather Bell at [email protected]