ETFs: Bond Investing 2.0 (TBT, TLT, IEF, TBF, SHY)

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March 25, 2012 10:20pm NYSE:IEF NYSE:SHY

Mark Wiedman:  As investors continue to grapple with low yields and volatile markets, a growing number are beginning to realize that the bond strategies of the past are just not behaving the way they

used to.  With the average yield on 10-year Treasuries at around 2%, you’re not even keeping up with inflation and once you add fees and taxes into the mix, you may actually lose money in what you’ve come to view as bedrock of your portfolio. But there is something you can – and should — do to respond.  Now is not the time to set it and forget it – it’s the time to take control and make active choices in the bond part of your portfolio.  This is a market where returns are difficult and you should be nimble, diversify and only take risks that offer the potential for commensurate rewards.

It’s not surprising that the current environment has led to record-breaking levels of fixed income ETF usage. Why wouldn’t you take as much control in the fixed income portion of your portfolio as the equity segment?  At iShares we like to call it a “quiet revolution” and believe the next phase of global industry growth will be primarily driven by institutional and retail investors embracing the benefits of cost, tax efficiency and transparency offered by passive fixed income ETFs.

The ability to buy and sell fixed income efficiently via an ETF—on an exchange, with clarity of pricing—has changed the way investors can access bond markets. While traditionally bond markets have long been defined by opaqueness – “Where can I find bonds?” “How much do they cost?” “Can I get a good price?” — fixed income ETFs are creating new centers of transparent liquidity and democratizing access for investors.  By offering price transparency at the ETF level and a liquidity layer that can exceed the underlying over-the-counter market, we may be creating a reference market of the future.  To me, that is truly revolutionary and an exciting development for investors.

iShares has been helping investors customize their fixed income portfolios since we created the first fixed income ETF nearly a decade ago so this is not a new story for us.  Over the course of the last ten years we’ve launched more than 40 fixed income products offering investor exposures across a wide range of sectors and markets.  What is new to the story is the size of the flows and the types of investors who, during this sustained period of low yield, are increasingly turning to ETFs in an effort to restore the potential for yield to their fixed income allocations. In January 2012, industry-wide fixed income ETF flows set a new monthly record of $9.0 billion up nearly 35% from the previous monthly record set in January 2009.

Flows like we’re experiencing right now don’t just fall from the sky – they have been slowly building over the last several years and we believe represent a shift in the way investors are thinking about their fixed income allocations.  ETFs have become essential building blocks in the dynamic portfolios that investors can build for the current environment.

In the coming weeks, we’ll be hitting the road and bringing this revolution to advisors and investors around the world. Taking more control of your fixed income investments in this brave new world — and using ETFs to do it — is something that we’re passionate about here at iShares and we think you should be too.

Mark Wiedman, Managing Director, is global head of the iShares business. He is a member of BlackRock’s Global Operating Committee.

Prior to moving to his current role in 2011, Mr. Wiedman was the head of Corporate Strategy for BlackRock. Before that, Mr. Wiedman led the clients and advisory team within the Financial Markets Advisory Group in BlackRock Solutions. This group advises financial institutions and governments on managing their capital markets exposures and businesses.

Prior to joining BlackRock in 2004, Mr. Wiedman, as executive director, led the global product development and strategy group at Morgan Stanley Investment Management. He previously was a management consultant at McKinsey & Co., advising financial institutions in the U.S., Europe, and Japan. He also served as senior advisor and chief of staff for the Under Secretary for Domestic Finance at the US Treasury Department. He has taught as an adjunct associate professor of law at Fordham University in New York and Renmin University in Beijing.

Mr. Wiedman earned an AB degree, Phi Beta Kappa, magna cum laude, in Social Studies from Harvard College in 1992, and a JD degree from Yale Law School in 1996.

Sources: U.S. Department of the Treasury – data as of 2/23/12; BlackRock Investment Institute ETP Landscape, February 2012.

Diversification may not protect against market risk.  Transactions in shares of the iShares Funds will result in brokerage commissions and will generate tax consequences. iShares Funds are obliged to distribute portfolio gains to shareholders.  There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.  Bonds and bond funds may decrease in value as interest rates rise.

ETF-DN Related Tickers: ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT),  iShares Barclays 7-10 Year Treasury Bond Fund (NYSEARCA:IEF), ProShares Short 20+ Year Treasury ETF (NYSEARCA:TBF), iShares Barclays 20+ Year Treas Bond ETF (NYSEARCA:TLT), iShares Barclays 1-3 Year Treasury Bond ETF (NYSEARCA:SHY).

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