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iShares Launches Multi-Asset, Global Junk Bond ETFs

April 20th, 2012

Eric Dutram: San Francisco-based iShares is the world’s largest exchange traded funds (ETFs) provider with 46% of the market share. It offers a variety of ETFs across different asset classes, sectors and industries. Managed by BlackRock Group, iShares launched two more funds earlier this month following the introduction of two high yield bond ETFs - iShares Emerging Markets High Yield Bond Fund (EMHY) and iShares Global ex USD High Yield Corporate Bond Fund (HYXU). (Read: iShares Debuts Two High Yield Bond ETFs)

Beyond these products, the company also recently debuted two more funds; the iShares Morningstar Multi-Asset Income Index Fund (IYLD) and iShares Global High Yield Corporate Bond Fund (GHYG). These ETFs, respectively, provide investors with exposure to a basket of securities across asset classes and, in GHYG’s case, to high yield bonds across the developed and emerging markets. These launches increase the total number of iShares ETFs to 267 far and away the most in the industry (Read:Go Local With Emerging Market Bond ETFs).

Additionally, they help to round out the company’s line-up in the bond and multi-asset spaces which were among the firm’s weakness spots before this year. For investors interested in what iShares has to offer in this regard, we have outlined the two new funds below:


iShares Morningstar Multi-Asset Income Index Fund (IYLD)

IYLD is broadly diversified passively managed fund seeking to deliver investors a high income while maintaining their long-term capital in the fund. IYLD is structured as a fund–of-funds that puts 60% of its assets in fixed income and the rest equally in equity and alternative income sources. (Read: Three Bond ETFs For A Fixed Income Bear Market)

With total assets of about $1.2 million, the product uses full replication strategy holding 1,888 stocks in the Morningstar Multi-Asset High Income Index. The fund consists of:

  • Three equity funds including, Dow Jones International Select Dividend Index Fund (IDV),  Dow Jones Select Dividend Index Fund (DVY) and S&P Global Infrastructure Index Fund (EMIF)
  • Five bonds funds including iBoxx High Yield Corporate Bond Fund (HYG), iShares JP Morgan USD Emerging Markets Bond Fund (EMB), Barclays 20+ Year Treasury Bond Fund (TLT), 10+ Year Credit Bond Fund (CLY) and S&P / Citigroup International Treasury Bond Fund (IGOV),
  • Two alternatives funds including S&P US Preferred Stock Index Fund (PFF) and FTSE NAREIT Mortgage Plus Capped Index Fund (REM).

The fund provides lot of flexibility using portfolio sampling and lending out one-third of the portfolio securities. This limits risks and generates additional income, an ideal situation for those with a low risk tolerance.

The ETF charges 60 bps a year in fees, which is lower than the category average of 74 bps suggesting it could be a decent choice from an expense perspective as well.  

iShares Global High Yield Corporate Bond Fund (GHYG)

iShares looks to expand its offering in the fixed income space with the recent launch of GHGY. The fund has allocated 66% to the U.S. and 4% each to United Kingdom and Luxembourg. The rest of the country exposure consists of a wide variety of nations including; the Netherlands, France, Canada, Bermuda, Ireland and Spain.

This fund has a low $4.9 million of AUM and seeks to replicate the price and performance of the Market iBoxx Global Developed Markets High Yield Index, before fees and expenses. (Read: Follow Buffett With These Developed Market Bond ETFs)

The fund represents the junk corporate bonds denominated in four currencies – US Dollar, Euros, Pound Sterling, and Canadian Dollar. In terms of credit quality, GHYG focuses the majority of its holdings on higher quality low-investment grade bonds (BB and lower), implying a higher risk profile in the space.

Yet, the fund does have a lower interest rate risk as the effective duration is just four years. Additionally, thanks to the high number of holdings—over 600 securities—as well as the decent yield– the underlying index generates an average yield to maturity of 7.01% and an average coupon rate of 8.12%– the product could be an interesting choice for global investors.

From the sector perspective, industrial and consumer services take the top pick in its basket followed by financial and telecommunications. The fund puts less than 15% of its assets in the top ten holdings, including HCA, Ford Motor, Calpine and Reynolds. The product charges fees of 40 bps per year from investors, roughly the same as others in the space. (Read: Top Three High Yield Financial ETFs)

Competition

In terms of competing products for IYLD, there are nearly 30 other ETFs available in the multi-asset space the most widely held of which are AOM and PERM. In the case of junk bonds, there are few 16 other choices with the recently launched HYXU and IHY focusing on the international market. (Read: iShares Debuts Two High Yield Bond ETFs)

iShares S&P Moderate Allocation Fund (AOM)

This fund is the oldest ETF in the space, having launched in November 2008. With assets of about $145.3 million, this is a popular fund-of-funds that seeks to replicate the price and performance of the S&P’s proprietary allocation model, which carries stocks of moderate risk. The fund uses a full replication strategy of the S&P Target Risk Moderate Index, holding 5,267 stocks in total.

It is a highly diversified passively managed fund as it invests in ETFs of different asset classes such as large-cap U.S. equity, mid-cap U.S. equity, emerging market securities, the aggregate bond market and the U.S. Treasury bond market. (Read: Emerging Market ETFs Own The First Quarter)

The fund is appropriate for investors seeking current income, some capital preservation and an opportunity for moderate to low capital appreciation. The fund charges a low fee of 32 bps per year and generated annual returns of 4.66% as of March 31, 2012. In addition, the product yields an annual dividend of 1.94%.

Global X Permanent ETF (PERM)

PERM was initiated on February 7, 2012 by the issuer Global X. This fund is evenly exposed to four asset classes – stocks, long-term U.S. treasury bonds, short-term U.S. treasury bonds, and precious metals like gold and silver. The permanent ETF also gives good exposure in different economic conditions including increasing growth, decreasing growth, increasing inflation, and decreasing inflation. The fund tracks the performance of Solactive Permanent Index, holding 88 securities in total. (Read: Global X Launches Permanent ETF (PERM))

Market Vectors International High Yield Bond ETF (IHY)

This ETF, having AUM of $14.8 million, was recently introduced by Van Eck. The fund seeks to replicate the performance of the BofA Merrill Lynch Global ex-US Issuers High Yield Constrained Index, before fees and expenses. The fund represents the high yield low rated corporate debt (BB and lower) denominated in four currencies – Euro, US Dollar, Canadian Dollar and Pound Sterling issued in the major domestic or Eurobond markets.

Country wise, the fund invests the majority of its assets internationally and may also include emerging market countries. (Read: Van Eck Launches International High Yield Bond ETF (IHY))

The product seems to offer higher yields as its underlying index yield to maturity is 8.33%. The fund is heavily weighted towards industrials and financials with about 74% and 21% of assets, respectively. With the lower duration of 4.05 years, it is the low cost choice in the high yield bond space with an expense ratio of 40%.

Given the increased interest in both junk bond ETFs and one stop shop solutions, iShares could have some winners on its hands with the new products. However, competition looks to be fierce and the multi-asset space is still struggling to see inflows in ETF form. Either way, it looks as though iShares is getting very aggressive on the product development front and is willing to put out more ETFs in hopes of maintaining its sizable lead in the AUM race.

See more on ETFs at the Zacks ETF Center.

Written By Eric Dutram From Zacks Investment Research   

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.


BATS:GHYG, BATS:IYLD, NYSE:AOM, NYSE:PERM


 

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