iShares Lists Ratings-Focused Bond ETFs

April 26, 2012

The world’s biggest ETF company continues its slicing and dicing of the bond space.

iShares, the world’s largest ETF provider, today rolled out two corporate bond funds that serve up narrowly focused exposure to specific tiers of credit ratings, adding to its growing lineup of ETFs listed on the Kansas City, Mo.-based BATS exchange.

The iShares Baa-Ba Corporate Bond Fund (BATS: QLTB) and the iShares B-Ca Corporate Bond Fund (BATS: QLTC) each track a Barclays benchmark that consists of fixed-rate, taxable corporate bonds that meet a certain credit rating.

In the case of QLTB, only those credits with “Ba” or “Baa” ratings that straddle the threshold of low-investment-grade and junk bonds will be included in the portfolio. QTLC meanwhile includes debt that’s only in the speculative zone with ratings ranging from “B” to “Ca.”

The funds join the company’s iShares Aaa-A Rated Corporate Bond Fund (NYSEArca: QLTA)—a fund that teases out the most highly rated corporate bonds in the market. The San Francisco-based ETF firm launched QLTA in February.

QLTA costs 0.15 percent in annual expense ratio, while the newcomers QLTB and QLTC have ERs of 0.30 percent and 0.55 percent, respectively.

iShares’ ratings-focused exposure is a first for the bond space. Still, the company is just one of many providers—such as Invesco PowerShares and State Street Global Advisors—that have been racing to open up new niches in the world of fixed-income ETFs, particularly in some of the more illiquid parts of the corporate debt segment.

The Nuts And Bolts

QLTB’s portfolio of 147 bonds—just over a tenth of its index’s 1,266 holdings—has an effective duration of 6.5 years and an average yield to maturity of 4.35 percent.

The fund, which allocates most heavily to bonds from the communications, consumer non-cyclical, energy and basic industry sectors, has issues from companies like Deutsche Telekom International, Kraft Foods, Citigroup and Altria Group among its top holdings.

QLTC, meanwhile, also tracks its index through representative sampling: It holds 111 bonds while its index has some 391 holdings.

The bulk of the portfolio’s bonds are in the 5- to 10-year-to-maturity range, but the fund has an effective duration of 4.4 years and an average yield to maturity of 8.33 percent, according to iShares data on its website.

In the last year, the Barclays indexes underlying QLTB and QLTC returned 9.8 percent and 6.1 percent, respectively. For comparison, the S&P 500 saw returns of 8.5 percent in the same period.

QLTC allocates 21 percent to the communications sector, with consumer-cyclical and non-cyclical bonds representing a combined 26 percent of the basket.


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