Impact Of iShares Bond ETF Index Changes

iShares made headlines last week by slashing fees in seven of its fixed-income ETFs and four equity funds. In that announcement, the asset manager also said four of those bond ETFs were getting new indexes later this summer.

The ETFs getting new benchmarks (and new names and tickers) include the iShares 1-3 Year Credit Bond ETF (CSJ), the iShares Intermediate Credit Bond ETF (CIU), the iShares 10+ Year Credit Bond ETF (CLY) and the iShares U.S. Credit Bond ETF (CRED).

Duration Changes Coming

The changes don’t take place until sometime between August and early October, but if you own one of these four funds, you should note that new indexes will impact exposure, and, in some cases, duration of the portfolios.

These are big, really successful ETFs that have been on the market for about a decade each. CSJ has $11 billion in assets under management, CIU has $7 billion, CRED has $1.5 billion and CLY has $625 million.

The most obvious change is in terms of exposure, according to BlackRock’s Heather Brownlie, U.S. head of fixed-income ETFs. The ICE BofAML (Bank of America Merrill Lynch) family of corporate bond indexes is more “pure play” than the current Bloomberg Barclays benchmarks being used, she says.

Specifically, the new indexes will pick from a broader universe of investment-grade corporate bonds, but deliver more focused, narrower exposure of corporates, excluding things like supranationals, municipal bonds and sovereign debt found in these ETFs today. These four funds will own only investment-grade corporate bonds later this summer.

Also important is the slight change to duration in two of the funds. Duration reflects a portfolio’s sensitivity to changes in interest rate, with longer-dated debt being more sensitive than short-term bonds.

• CSJ will have portfolio maturity moving from 1- to 3-year to 1- to 5-year
• CIU portfolio maturity is moving from 1- to 10-year to 5- to 10-year

Brownlie says the changes should help investors implement these strategies more easily in a “modular” way.

“A lot of people say bonds are too hard a market to navigate,” said Brownlie. “But these types of funds make it clear from an asset allocation perspective that ETFs are great tools to build a bond portfolio.”

“Bonds are actually really simple. It’s all about income and duration,” she added. “The new indexes make these ETFs more pure-play building blocks for investors to toggle up and down their exposure to corporate debt.”

Contact Cinthia Murphy at [email protected]