iShares Plans Active Sovereign Bond ETF

March 07, 2012

iShares looks to market an active global sovereign bond ETF focused on higher-quality debt.


iShares, the world’s largest exchange-traded fund company, filed regulatory paperwork this week to market an active sovereign fixed-income ETF that will own bonds with relatively high credit quality issued by countries around the world in developed as well as developing markets.

The iShares Sovereign Screened Global Bond Fund escapes the pitfalls of traditional bond benchmarks, which weight securities based on market capitalization, meaning investors make their biggest bets on the biggest debtors. Such strategies can be disastrous, with Greece looming as the best current example.

The iShares filing is the latest sign that fund companies are eager to meet investor demand for debt that steers clear of overly indebted nations, which these days are largely in the developed world. iShares said 44 nations were within its proposed fund’s investable universe.

While index ETFs focused on sovereign debt abound, it appears that the $1.2 billion WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD) is the fund most like the one iShares is planning. While ELD is only focused on developing countries, its allure, like iShares’ planned fund, is that it holds debt of financially stable issuers.

Of course, it’s only a matter of time before index ETFs designed to avoid debt-gorged countries start coming to market.

The launch in January of the Citi RAFI Bond Index series focused on sovereign debt suggests that the writing is on the wall. RAFI indexes are designed by Rob Arnott’s Research Affiliates.

Prospectus Details

The universe of sovereign debt issuers that will be covered by the iShares Sovereign Screened Global Bond Fund is primarily drawn from the BlackRock Sovereign Risk Index, which uses a proprietary model that scores countries using a list of relevant fiscal, financial and institutional metrics to assess sovereign credit risk.

These country scores, along with other model-driven factors, are used to construct the fund’s investment portfolio by screening out lower-scoring countries and weighting the remaining sovereigns based on their scores.

Under normal circumstances, the fund will invest at least 80 percent of its net assets in bonds denominated in the dollar and local currencies.

Because it is an actively managed fund, the planned iShares ETF may have higher portfolio turnover than a fund that replicates an index. Although this fund may experience relatively higher portfolio turnover, it does not invest in swaps agreements, futures contracts or options contracts.

One potential risk according to the prospectus for this ETF is that it might invest in junk bonds including those rated below “BBB-”—the lowest rating that’s still considered investment grade in Standard & Poor’s credit-ratings rubric.

Another potential risk is that due to a limited trading history, there’s no assurance that the ETF’s shares will trade at premiums or discounts to the fund’s net asset value.

The 44 countries iShares said are currently among the fund’s possible choices are: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Croatia, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Peru, the Philippines, Poland, Portugal, Russia, South Africa, South Korea, Spain, Sweden, Switzerland, Thailand, Turkey, the United Kingdom, the United States and Venezuela.

The iShares filing didn’t disclose the proposed fund’s ticker or its annual expense ratio.


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