Fresk: iShares ‘Core’ Means New Exposures

June 19, 2014

New iShares core offerings delve into new and worthwhile index exposures.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Clayton Fresk, CFA, portfolio management analyst at Georgia-based Stadion Money Management.

As previously noted on, iShares recently announced it was expanding its family of “Core” ETFs. This included an expense ratio reduction on a handful of existing funds plus the addition of four new funds, three on the equity side and one on the fixed-income side.

What I really want to get into is that iShares changed the index on two of the existing fixed-income funds. These changes have allowed investors access to exposure previously not available in ETF form. I’ll highlight the changes and additions and how they differ from existing ETF offerings.

The “Core” offering, including the 10 new additions, now amounts to 20 funds covering large swaths of the U.S. and international equities and fixed-income markets.

For my purposes now, I want to take about five of the 10 new additions to the Core franchise—four in detail in terms of the innovation on the indexing methodologies that truly represent new territory for investors. Three of those are bond funds and the fourth is a dividend-focused equities fund.

Fixed Income

On the fixed-income side, iShares has added the iShares Core Total USD Bond Market ETF (IUSB), which tracks the Barclays U.S. Universal Index. iShares has also changed the index on two other fixed-income funds to tracks subcomponents of the Universal index:

  • iShares Core Short Term USD Bond (ISTB) – now tracks the U.S. Universal 1-5 Year index
  • iShares Core Long Term USD Bond ETF (ILTB) – now tracks the U.S. Universal 10+ Year index

There are numerous differences between the Universal indices and the more traditional Aggregate bond indices.

One difference is lifting the requirement of an investment-grade rating. As such, the Universal index will include corporate high-yield bonds. Additional index exposures outside the Aggregate Index also include emerging markets (USD-denominated) debt, eurodollar, 144A issuance and non-ERISA CMBS.

In essence, the Universal index is a more encompassing version of the Aggregate.

Overall, Aggregate index exposure makes up for a large percentage of the Universal index. According to Barclays, the Aggregate makes up 83 percent of the Universal index, with the next largest additional exposures being high yield at 6.6 percent and 144A at 6.2 percent.


An important differentiating factor is the yield advantage offered by the Universal index over the Aggregate. As of June 16, this equated to a nearly 30 basis points of yield advantage for the Universal index. The trade-off for this yield advantage is a riskier portfolio due to the inclusion of high-yield debt and a potentially less liquid portfolio because of 144A bonds.

Based on the cost structure, IUSB allows an advisor to capture this “additional” exposure at a very reasonable cost. Breaking down the exposure to an aggregate and “nonaggregate” view, the additional exposure costs about 50 basis points in expense ratio:

  • Aggregate: 83 percent of IUSB costing 8 basis points (using the iShares U.S. Aggregate Bond ETF (AGG | A-97) as a proxy)
  • Nonaggregate: 17 percent of IUSB costing 50 basis points
  • Combining those two factors, I arrive at IUSB’s 15 basis point expense ratio

This additional cost seems inexpensive for the exposure captured.

After all, accessing high-yield debt using the iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-69) costs 50 basis points; and getting at developing markets debt via the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB |B-50) costs 60 basis points.

Apart from the attractive cost considerations, there’s the additional fact that using a fund with a “Universal” index can capture other exposure not currently available in ETF form; namely, eurodollar, 144A and non-ERISA CMBS.

Taking a long-term view over the past 20 years on a total return aspect, the Universal index has outperformed the Aggregate index by 0.20 basis points per year, or a return of 6.34 percent versus 6.14 percent.


The index changes on these two existing funds, ISTB and ILTB, will also have an effect of broadening the exposure as compared with the previous exposure. Both ETFs previously tracked government/credit indexes. As such, securitized exposure was excluded from each.

For ISTB, the new index will now include MBS exposure with original maturities of 15 years or less. This is in addition to the aforementioned exposure that falls within the shorter maturity band. According to Barclays, this securitized exposure makes up about 14 percent of the index. This additional exposure will differentiate ISTB from other short-term bond ETFs, such as the Vanguard Short Term Bond (BSV | A-68).

For ILTB—the long-term debt ETF—the main differential will be the addition of the aforementioned exposure that falls in the 10+ year maturity band. However, this index doesn’t include securitized bonds, which are limited to the shorter maturity indexes based on their duration profile.



Within U.S. exposure, the new offering, the iShares Core Dividend Growth ETF (DGRO), is a complement to an existing dividend fund, the iShares Core High Dividend (HDV |A-67), which has been added to the core lineup. Both funds have an annual expense ratio of 12 basis points. (HDV previously was 40 basis points, as iShares aims for rock-bottom pricing on its Core lineup.)

While HDV focuses on dividend yield and selects the highest-yield stocks that meet index eligibility, DGRO focuses on dividend growth and selects stocks that have passed dividend growth sustainability screens.

As such, DGRO will have more cyclical exposure, whereas HDV will have more noncyclical. The GICS sector breakdown is as follows:

Industrials 16.54 0.91 15.63
Consumer Discretionary 12.74 3.82 8.92
Financials 6.89 0.77 6.12
Information Technology 14.28 8.21 6.07
Materials 3.94 2.03 1.91
Energy 9.82 13.91 -4.09
Consumer Staples 20.36 25.87 -5.51
Utilities 5.42 13.17 -7.75
Health Care 9.82 19.58 -9.76
Telecommunication Services 0.00 11.60 -11.60

DGRO will join a very small group of dividend ETFs that focus on dividend growth vs. yield.

Another name in this space worth mentioning is the WisdomTree US Dividend Growth Fund (DGRW | B-71).

As concerns over rising interest rates continue, these dividend growth names may suffer less of a drag, as they would be less correlated to interest rates than their higher-yielding counterparts would, and as such, may be an attractive substitute and/or complement to an existing portfolio.


The takeaways from these iShares additions to its Core ETF lineup is that investors are really getting new access to parts of the investment universe via indexing innovations that weren’t previously available.

Even better, these “Core” ETFs truly are inexpensive, and for investors, there’s no downside to keeping costs tightly controlled.

At the time this article was written, Stadion held long positions in HDV and BSV.

Founded in 1993, Stadion Money Management is a privately owned money management firm based near Athens, Ga. Via its unique approach and suite of nontraditional strategies with a defensive bias, Stadion seeks to help investors—through advisors or retirement plans—protect and grow their “serious money.” Contact Stadion at 800-222-636 or References to specific securities or market indexes are not intended as specific investment advice.


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