In a low interest rate environment, bond investors often face some unattractive choices: Take on higher credit risk or deal with the lower yields on higher grade bonds.
The new iShares Yield Optimized Bond ETF (NYSEArca:BYLD) aims to solve that conundrum. BYLD uses a fund of funds approach as its seven holdings are all other iShares bond ETFs.
That lineup is comprised of the following ETFs: The iShares MBS ETF (MBB) , iShares iBoxx $ High Yield Corporate Bond ETF (HYG) , iShares Intermediate Credit Bond ETF (CIU) , iShares 1-3 Year Credit Bond ETF (CSJ) , iShares 20+ Year Treasury Bond ETF (TLT) , iShares 10+ Year Credit Bond ETF (CLY) and the iShares Floating Rate Bond ETF (FLOT) . [Fans of Floating Rate ETFs]
The U.S. accounts for almost 71% of BYLD’s geographic weight with small weights to other developed markets such as the U.K. and Canada. BYLD’s offerings span various duration, risk and yield spectrums, making the new ETF a potentially useful play at a time when pinpointing the Federal Reserve’s interest rate agenda is difficult.
Two Fed members “think that the federal funds rate should stay right where it is until the end of 2015. And one participant is calling for a rate that is three percent higher than it is today. That is a pretty significant spread. The more conservative members are essentially saying that the Fed will need to raise short term interest rates by 25 bps at each of the eight meetings in 2015,” said iShares Head of Fixed Income Matt Tucker in a note out earlier this week. [BlackRock: Connecting the Dots on Fed Policy]
The diversity offered by BYLD could prove appealing to investors dealing with generating yield on bond investors in a low interest rate world.
Yields on traditional core bonds are down 50% since 2008, but generating a 5% income stream requires taking on three times the risk as it did in 2008, according to iShares.
BYLD has an effective duration of 5.12 years and an annual expense ratio of 0.28%.
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of HYG and TLT.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.