iShares Plans Financials-Free Corporate Bond ETF

iShares, the market’s largest purveyor of ETFs, filed paperwork with regulators to market a corporate bond fund that looks to build upon the success of the $25 billion iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD), the biggest fixed-income fund in the world, except that it steers clear of financial issuers.

The iShares Corporate Bond Fund will invest in corporate debt, but unlike LQD, will also include dollar-denominated investment-grade bonds that are issued by non-U.S. corporations. What’s more, this new strategy will exclude financial-issuer debt, a move that could make the fund more appealing to risk-averse investors.

LQD, which has seen net inflows of some $6.7 billion so far this year, is not strictly a domestic portfolio but it allocates just over a third of its exposure to the financial sector.

But yield spreads on financial institution bonds have been wider than other sectors in this current environment of economic uncertainty amid concerns over debt levels, as Gene Koyfman, IndexUniverse analyst, pointed out in a blog recently. That makes them a riskier investment.

“Spreads on financial bonds are higher than utilities or industrials,” Koyfman said, confirming that what was true about bond-yield spreads in the spring when he wrote his blog still holds true today.

More broadly, iShares’ move is yet another response to insatiable investor demand for yield-generating strategies at a time when income is compressed in more traditional fixed-income securities such as U.S. Treasurys.

The filing didn’t provide too many details, including what index the ETF will track, except to say that the underlying benchmark of this new fund is built off of the Barclays U.S. Credit Index, which comprises dollar-denominated investment-grade securities.

According to the filing, the methodology strips the “parent index” of bonds from financial issuers, and of securities maturing outside of the fund’s proposed term.

Indeed, the new ETF is a “term fund,” meaning it terminates at a certain date, at which time iShares distributes the remaining assets to investors, the filing said. Again, how long that term is wasn’t disclosed, and neither was any planned ticker or fees.

“The underlying Index includes U.S. dollar-denominated, investment-grade securities publicly issued by U.S. and non-U.S. issuers, that have $250 million or more of outstanding face value at the time of inclusion,” the filing said.

Bonds need to be registered with the Securities and Exchange Commission and be rated at least “Baa3”—per Moody’s rating system—to qualify for the portfolio.


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