Posts Tagged ‘Ishares’
The Evolving Investor/Advisor Relationship (Martin Beaulieu)
Friday, February 22nd, 2013
by Martin Beaulieu, BlackRock, iShares
Those of us a certain age remember when riding in the back of a car meant little access to the view of the road ahead, a floaty ride and very little in the way of safety equipment. Consequently many of us fought to ride in front where the view was better, it was easier to converse with the driver and occasionally steer the car when help was needed. And very often seat belts were for front occupants only.
Today, more investors of all ages are demanding to ride in the front seat with their advisors. Prior to 2008 many investors were comfortable in the backseat, not realizing the inherent dangers of overly correlated asset classes, static portfolio management and strong domestic equity biases that dominated many portfolios after a 25 year secular bull market for equities.
Though portfolio “safety features” certainly existed prior to 2008, their popular use was limited. Similar to our analogy, many car passengers don’t realize that safety glass was invented in 1903 and seat belts were first installed in Saab cars in 1958. It took many decades of conversation by safety “zealots”, reviews by government agencies and eventually strong consumer demand to popularize many of today’s safety features.
Fortunately for current investors, many portfolio safety features after 2008 took only a few years to be popularized and widely embraced. As examples, tactical global asset allocation, go anywhere portfolios, aggressive use of cash and market tools that can temper adverse market events are all widely used in the retail marketplace. Previously, many of these strategies were only available, and understood, by a select few in investment management.
Today’s advisors are well educated and trained, often participate in broad functional teams, utilize portfolio construction experts and seek information from many sources, including from us, the world’s largest asset manager. In general, they are equipped to be much better “drivers” than their peers of 20 or 30 years ago.
Which is a good thing. It seems unlikely investors will want to give up their newfound proximity to the portfolio construction process or settle for only periodic rebalancing of their portfolio to manage risk and enhance return. It’s these two reasons of better advisor “safety” tools and increasing investor knowledge and engagement that allows for a new relationship between advisors and investors.
For today’s investor, riding in the backseat isn’t good enough anymore. Investors today want to ride shotgun, and occasionally steer the car too. So how can we help? Over the coming months, I’ll be sharing investment ideas and insights from our discussions with clients – solutions that make the most of this evolving investor/advisor relationship.
Welcome to the new journey of investing.
Martin Beaulieu, Managing Director, is Co-Head of the BlackRock’s U.S. iShares business and leads the U.S. iShares Wealth Advisory group. As Co-Head of the U.S. iShares business, Marty oversees the strategic direction of the business and defines the key priorities to enhance competitiveness and market share growth. The U.S. iShares Wealth Advisory business, which Mr. Beaulieu oversees, is responsible for the distribution of iShares investment solutions through intermediaries.
He has spent 28 years in the investment management industry, the last 22 years with MFS Investment Management. He served for nine years as Head of Global Distribution and was named Vice Chairman in 2010. Previous responsibilities included growing MFS’s full service 401k record keeping business to $17B of client assets, managing as Chair a Luxembourg based UCITS fund family and serving as CEO of McLeanBudden, a 65 year old Toronto based asset manager, during its integration into MFS.
Mr. Beaulieu earned a BA degree from Santa Clara University in 1980.
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How ETFs Act as a Price Discovery Vehicle During Market Holidays
Wednesday, February 13th, 2013
by Keegan Toci, iShares
Sunday marked the beginning of the 2013 Lunar New Year, and like any other New Year celebration, businesses will go dark and capital markets will close in the countries where the holiday is celebrated. Because of this, many international ETFs will be affected because some of their underlying securities may not be available to trade throughout the multi-day holiday (see below). However, during these extended underlying exchange closures, the US market will remain open and US-domiciled ETFs – even the ones that provide international exposures – will continue to trade. So how do foreign market closures affect these ETFs?
First, it’s important to understand why this matters. ETFs can be created and redeemed in large quantities throughout the day by market players called authorized participants (APs). They do so by delivering a basket of the underlying securities to the ETF provider in exchange for a basket of the ETF shares, or vice versa. When the underlying securities aren’t available to buy or sell – say, because the market on which they trade is closed – the APs need to make an educated guess about where these securities will be trading once the exchange opens again.
You can see how this situation isn’t limited to holiday closures like the Lunar New Year. Every day, authorized participants in the US have to make these educated guesses in order to facilitate creations and redemptions in US-domiciled international ETFs, simply because the underlying securities trade on an exchange that closed hours ago due to time zone differences. For example, the iShares MSCI EAFE ETF (EFA) is comprised of securities that trade on stock exchanges in Asia, Australia and Europe, but EFA itself trades on the US stock market during US market hours (see below).
Now, this may seem like a hassle for the authorized participants, but the truth is there are many ways for them to make educated guesses about where these securities should trade when their exchanges are closed. One popular method is to use the percent change of the US market (for example, via the S&P 500) and assume that other countries will have a similar move, while also incorporating the continuously traded foreign exchange market to account for currency movements.
But the takeaway for ETF investors is that there’s an unintended (but very important) benefit to all this, and that is that these US-domiciled international ETFs can actually continue to price in information about the underlying securities even when foreign markets are closed. It’s a phenomenon we in the ETF business refer to as “price discovery”, and it’s happening every day.
So let’s go back to our Lunar New Year example to see how this all applies. We already said that this price discovery process is happening every day due to time zone differences, but what happens when there’s an extended closure like this one? Because an ETF’s net asset value (NAV) is based on the last closing price of its underlying securities, you would expect the NAV for the ETFs in question to go stale over the course of the market closures. In other words, while the ETF’s market price will continue to price in new information, the NAV will remain the same. This can lead to a greater than usual difference between the NAV and the market price of the ETF.
How dramatic do we think this difference will be? Although we’d expect there to be some deviation between market price and NAV, price discovery may still keep these funds in-line with their fair value. But as time ticks forward, it becomes more difficult to determine the true value of the underlying holdings. It is worth noting that the bid/offer spreads on affected funds remained at normal levels during the previous Lunar New Year holiday, as did average daily volume. My team, the iShares Capital Markets Group, expects this year’s holiday to be no different.
The bottom line: Every day, in normal and abnormal markets, ETFs are an investment vehicle of choice for providing investors with price discovery. Time and time again, investors have looked to ETFs to get access to other markets, even when those markets may be closed. So Gung Hay Fat Choy. Enjoy the holiday – and remember that the closures of so many markets around the world shouldn’t impact your ability to trade an ETF here in the US.
Shares of the iShares Funds may be sold throughout the day on the exchange through any brokerage account. However, shares may only be redeemed directly from a Fund by Authorized Participants, in very large creation/redemption units. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.
Copyright © iShares
3 Bond Strategies for 2013 (Tucker)
Tuesday, February 5th, 2013
by Matt Tucker, iShares
Over the past couple of months, Russ Koesterich has been outlining his outlook for markets and economies in the coming year. In short, he believes the most likely scenario is that the world – in particular the US – will continue to see slow but stable growth in 2013, with developed markets increasingly being influenced by policy decisions.
Turning to bond markets specifically, perhaps the biggest factor shaping 2013 is the ongoing low interest rate environment, which doesn’t look to be changing significantly any time soon. The Fed has made its intentions clear, targeting an unemployment level with a limit on inflation before being willing to raise rates. Meanwhile there continues to be heightened demand for US Treasuries from non-price sensitive central banks and investors seeking perceived “safe haven” investments. Until the Fed acts and Treasury demand wanes, we’re likely to experience depressed rates for the foreseeable future.
So what are the implications for bond investors? Here are a few strategies to consider:
- Focus on municipals and credit. The hunt for yield will continue to be a challenge in 2013, so we’d expect to see a sustained interest in riskier fixed income sectors such as high yield and investment grade credit bonds. Also, municipal bonds remain competitive on a tax-adjusted basis for US investors. Potential iShares solutions: iShares High Yield Corporate Bond ETF (HYG), iShares Investment Grade Corporate Bond ETF (LQD), iShares National AMT-Free Muni Bond ETF (MUB)
- Look outside the US. Just as equity investors are reassessing home country bias this year, so are bond investors finding more opportunities outside of the US and, in some cases, outside of developed markets. In 2012, demand for emerging market bond exchange traded products (ETPs) doubled to $20bn. As investors continue to diversify their bond holdings and search for yield, we expect this will remain a popular category. Potential iShares solutions: iShares Emerging Markets USD Bond ETF (EMB)
- Rethink the role of Treasuries. While we’re not likely to see significantly higher rates in 2013, even a modest increase in yields would have a significantly negative impact on Treasury prices. But does this mean that investors should avoid them altogether? Not so fast. As bond investors rotate into the sometimes much riskier sectors mentioned above, it’s important to remember that even a small amount of Treasuries can anchor a portfolio’s risk. Potential iShares solution: iShares Treasury Bond ETF (GOVT)
No matter what the outlook is, you should always consider what role fixed income is playing in your portfolio when implementing a bond strategy. Is the objective to provide income? Lower overall portfolio risk? Add diversification? The answers to these questions can be the key to selecting the right bond investment for you in 2013 and beyond.
Sources: BlackRock, Bloomberg
Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to the iShares Blog. You can find more of his posts here.
Bonds and bond funds will decrease in value as interest rates rise and are subject to credit risk, which refers to the possibility that the debt issuers may not be able to make principal and interest payments or may have their debt downgraded by ratings agencies. An investment in the Fund(s) is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. High yield securities may be more volatile, be subject to greater levels of credit or default risk, and may be less liquid and more difficult to sell at an advantageous time or price to value than higher-rated securities of similar maturity. A portion of MUB’s income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains, if any, are subject to capital gains tax. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.
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2 Popular Minimum Volatility ETF Strategies
Tuesday, August 21st, 2012
by Del Stafford, iShares
By now, you’ve probably heard about the benefits of a minimum volatility (or, “min vol”) strategy and the ETFs that seek to deliver it, but you might still be wondering how to use these funds in a portfolio. One common misconception is that min vol ETFs are a tool designed for volatile markets specifically, but this simply isn’t the case. In fact, the two minimum volatility ETF strategies we see our clients using most often are both strategic, long-term plays that have nothing to do with current market volatility. These two strategies are: 1) lowering overall portfolio risk or 2) increasing allocation to equities without increasing overall portfolio risk.
Lower overall portfolio risk
Investors who are trying lower their overall portfolio risk can simply replace their existing market capitalization based equity investment with the corresponding minimum volatility ETF. For example, let’s say a client’s portfolio consists of 60% equity and 40% fixed income. Let’s use the MSCI USA Index to represent “equity” and the Barclays US Aggregate Bond Index to represent “fixed income”. The client would replace the 60% allocation to the MSCI USA Index with a 60% allocation to the MSCI USA Minimum Volatility Index.
This strategy would result in a ~20% reduction in portfolio risk since inception of the analysis (June 2008) and an even greater reduction in risk in the nearer term (see below).
Increase allocation to equities without increasing overall portfolio risk
Like the example above, an investor looking to employ this strategy would start by replacing their existing market capitalization based equity investment with the corresponding minimum volatility ETF, but then they would also increase their allocation to the minimum volatility ETF while decreasing their allocation to fixed income. After replacing the MSCI USA Index with the MSCI USA Minimum Volatility Index, the investor would increase their allocation to the MSCI USA Minimum Volatility Index and decrease their allocation to the Barclays US Agg Bond Index until the total portfolio risk reaches the level they desire. For example, they may seek a level of portfolio risk that is just below the since inception risk of the Original Portfolio, which is 12.15%.
This strategy allows the investor to increase their allocation to equity by 17% while obtaining a consistently lower level of risk than the Original Portfolio (see below).
While there are certainly other ways to employ minimum volatility ETFs in a portfolio, our team has found that these two strategies are the most commonly used among our clients.
Source: Markov Processes International (MPI)
Del Stafford, CFA is the iShares Head of Product & Investment Consulting and a regular contributor to the iShares Blog. You can find more of his posts here.
The iShares Minimum Volatility Funds may experience more than minimum volatility as there is no guarantee that the underlying index’s strategy of seeking to lower volatility will be successful.
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Tags: Barclays, Bond Index, Case In Fact, Common Misconception, Current Market, Equity Investment, ETF, ETFs, Fixed Income, Inception, Investor, Investors, Ishares, Market Capitalization, Market Volatility, Msci, Portfolio Risk, Risk 2, Usa Index, Volatile Markets, Volatility Index
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Is Dodd-Frank the Death of Preferreds?
Wednesday, August 8th, 2012
by Mariela Jobson, iShares
Investors typically don’t like uncertainty, and regulatory uncertainty is no exception. So it’s not surprising that our sales team has been fielding a lot of questions from clients about the iShares S&P US Preferred Stock Index Fund (PFF). Clients are wondering what impact regulations put in place after the 2008 financial crisis might have on PFF specifically and preferred securities in general.
As the portfolio manager for our preferred stock ETFs, I spend a lot of time with our sales team and clients, helping them to understand the complexities of these products. Here, I’ve recapped the two main conversations I’ve been having with investors about the effects of these regulations on preferreds:
Q: Will regulatory changes deplete the supply of preferred stocks?
A: First, it’s important to understand what the regulatory changes are, and how they assumedly will affect preferreds. The preferred market is going through a significant transition driven by the Dodd-Frank (D-F) legislation. Under D-F, the Tier 1 capital treatment of hybrid and trust preferreds from bank holding companies will be phased out at 25% per year from 2013 until 2016. The fear is that the law will change the preferred market and could shrink the market size over the next few years. As of 8/4/12 approximately 22% of PFF’s holdings were trust preferreds that would be affected.
So what does this change really mean for preferred stocks? First, it helps to remember that the change does not actually forbid the issuance of trust preferred securities. Even after D-F goes into effect, banks may still choose to issue trust preferred shares, and they can simply opt to exclude them as part of their Tier 1 capital calculation. One reason they may choose to do this is because the interest is tax deductible.
In addition, this change is only aimed at hybrid and trust preferred securities — not the entire asset class. Companies are still issuing and should continue to issue perpetual preferred securities (see chart below). Preferreds are typically a more cost-efficient cost of capital than common equity, and as such they have been an attractive source of financing for companies.
Q: With the onset of the Dodd-Frank Act, will large volumes of preferreds be called?
A: In response to the new rules, banks can either call their preferred securities and replace them with another form of capital if needed, or they can let them continue to mature. The current low rate environment is increasing the possibility of securities of being called similar to any other security that has a call option, and in some cases, banks have the option of calling the securities even prior to normal five-year call protection.
But at this point, we believe it is highly unlikely that banks would call all of their trust preferred securities. Many of them have publicly stated their intention not to – for example, JP Morgan only plans to call half of their trust preferred issues. Instead, we believe banks will call their preferreds over time. While it is always difficult to predict what decisions management will make, we believe the chart below – which illustrates expected call dates for preferreds within PFF if prices remained at current levels and issuers were solely motivated to call based on trading prices – shows a more likely scenario.
The bottom line is that despite these regulatory changes, investors can still consider using preferred stock as part of a diversified income-oriented portfolio. While Dodd-Frank may change the treatment of trust preferred securities, we do not believe it will curtail the supply of preferreds, and as new preferreds are offered, they should continue to make their way in to PFF.
Sources: BlackRock, Bloomberg as of 6/30/12
Mariela Jobson, Vice President and portfolio manager in BlackRock’s iShares Index Equity Portfolio Management Group.
Ms. Jobson’s service with the firm dates back to 2006, including her years with Barclays Global Investors (BGI), which merged with BlackRock in 2009. At BGI, she was a portfolio manager for the index equity team, focusing on iShares and taxable accounts. She was responsible for managing U.S. and global portfolios, including preferred equity. Prior to joining BGI, Ms. Jobson worked as an equity research analyst in the asset management group at ING Investments in New York and at Wedbush Morgan Securities in Los Angeles.
Diversification may not protect against market risk. In addition to the normal risks associated with investing, narrowly focused investments typically exhibit higher volatility. Preferred stocks are not necessarily correlated with securities markets generally. Rising interest rates may cause the value of the Fund’s investments to decline significantly. Payment of dividends is not guaranteed. Removal of stocks from the index due to maturity, redemption, call features or conversion may cause a decrease in the yield of the index and the Fund.
Tags: asset class, Bank Holding Companies, Complexities, Dodd, Financial Crisis, Ishares, Issuance, Jobson, Mariela, Pff, Portfolio Manager, Preferred Market, Preferred Shares, Preferred Stocks, Regulatory Changes, Regulatory Uncertainty, Stock Index Fund, Tier 1 Capital, Trust Preferred Securities, Trust Preferreds
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Mythbusting: How Elections Affect Markets
Friday, August 3rd, 2012
by Russ Koesterich, Chief Investment Strategist, iShares
Elections do matter for the markets, but not necessarily for the reasons that investors tend to believe. Ahead of the US presidential election in November, I’m going to attempt to debunk some of the common myths surrounding markets and elections:
Myth #1: Party affiliation matters when it comes to market returns.
There is little to no evidence to support the fact that the winning candidate’s party makes a difference to markets. Over the past century, which party occupies the White House has had no discernible or consistent impact on US equity markets. Since 1900, when a Democrat has been in the White House, the average return for the Dow Jones Industrial Average has been around 8.5%; for Republicans the average is around 6% (neither average includes dividends). When you adjust those averages for the market’s volatility, the numbers are statistically the same. In other words, the party affiliation of the president has had no consistent influence on stock market performance, though many investors still believe this.
Myth #2: Divided government is good for the financial markets.
Following the halcyon days of the 1990s, many investors have come to believe this myth. While divided government was certainly good for markets in the 1990s, that seems to have been an anomaly. The 1990s were unusual and were a function of many factors, including a secular drop in interest rates, a productivity surge, and the taming of inflation. Unfortunately, conditions are very different today.
Looking at the last century of data, there is no evidence that divided government produces better returns. In fact, in the past equities appear to have actually done better when one party has controlled both Congress and the White House, though the numbers backing this better performance aren’t statistically significant and should be taken with more than a grain of salt.
What Does Matter: Policy
None of the above implies that the outcome of this election is irrelevant for financial markets. While politicians cannot fix much of what ails the global economy, sensible economic policy would help mitigate the damage. There is also quite a bit that politicians can do to make matters worse. In short, as I write in my new Market Perspectives piece, the election will matter a great deal.
There are a number of issues, both long and short-term, which can only be solved in Washington. The absence of progress will likely worsen the economic malaise and in the case of the fiscal cliff push, the United States back into recession. On the other hand, real progress on taxes and entitlements could remove at least some of the headwinds holding back growth.
Both the fiscal cliff and the entitlements issue are extremely important to the capital markets. Evidence that we’re not doing everything we can to resolve them is likely to push stocks lower and volatility higher. To state the obvious, should we allow this to occur it would be a game changer for US financial markets.
If we wake up on the morning of November 7 with continued divided government and no consensus on reform and then no consensus is reached before the fiscal cliff hits in January, investors may want to consider opting for these five portfolio moves:
1.) Less equity exposure
2.) A higher allocation to defensive sectors like consumer staples and healthcare, accessible through the iShares S&P Global Consumer Staples Sector Index Fund (NYSEARCA: KXI) and the iShares S&P Global Healthcare Sector Index Fund (NYSEARCA: IXJ).
3.) Less credit exposure in the fixed income section of their portfolios
4.) A smaller allocation to commodities
5.) A higher weight to dollar-denominated assets
Source: Bloomberg
Russ Koesterich, CFA is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog. You can find more of his posts here.
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments typically exhibit higher volatility.
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Tags: 1990s, Anomaly, Chief Investment Strategist, Common Myths, Democrat, Dividends, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Financial Markets, Grain Of Salt, Halcyon Days, inflation, Ishares, Koesterich, Myth 2, Party Affiliation, Russ, Stock Market Performance, Us Presidential Election, Volatility
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Mythbusting: Emerging Market High Yield Bond Risk
Friday, August 3rd, 2012
by Del Stafford, iShares
Emerging market high yield bonds – about as risky as an asset class can get, right? After all, emerging markets are known for carrying a significant amount of risk, and high yield bonds are one of the more speculative sectors within fixed income. Put the two together, and aren’t you doubling down on risk? I thought the same myself before researching this very topic, but to my surprise I found that is not [always/necessarily] the case.
First, most investable emerging market high yield indices contain bonds that are issued in US dollars (USD), so with these indices there isn’t additional risk from owning other currencies. Also, emerging market high yield generally includes sovereign bonds (issued by a government) and quasi-sovereign bonds (issued by an agency backed by a government), while US high yield generally only includes corporate bonds.
Corporate bonds are typically viewed as riskier than government bonds, even when they have the same credit quality rating. In times of market volatility and stress, you can see that play out in what is commonly referred to as a “flight to quality”. For example, we saw this happen during the credit crisis of 2008 when the market largely sold out of corporate bonds and bought US Treasuries.
The sovereign and quasi-sovereign exposure in emerging market high yield caused it to behave differently from other risk assets during 2007-2009. The below chart shows correlations of emerging market high yield (Barclays EM High Yield Index), US corporate high yield (Barclays US Corporate High Yield Index), emerging market equities (MSCI Emerging Markets Index) and developed international equities (MSCI EAFE Index) to US equities (S&P 500 Index) during this time period. You can see that developed international equities, emerging market equities, and US high yield increased in correlation but emerging market high yield decreased in correlation.
In addition, when you look at historical volatility in the below chart, emerging market high yield has experienced comparable levels of risk to US high yield over the past seven years.
Now, the intent here isn’t to say that emerging market high yield bonds are for everyone, but rather to challenge investor assumptions about the investment’s risk profile. Investors interested in emerging market high yield debt should still consider whether it suits their portfolio needs (Matt Tucker’s recent post may be helpful).
Source: Markov Processes International (MPI)
Del Stafford, CFA is the iShares Head of Product & Investment Consulting and a regular contributor to the iShares Blog. You can find more of his posts here.
Correlation is a statistical measure that captures the degree of the historical relationship between the returns of a pair of investments or indexes.
Correlation ranges between +1 and -1. A correlation of +1 indicates returns moved in tandem, -1 indicates returns moved in opposite directions, and 0 indicates no correlation.
Standard deviation is the statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution. It is widely applied in modern portfolio theory, where the past performance of securities is used to determine the range of possible future performance, and a probability is attached to each performance.
Bonds and bond funds will decrease in value as interest rates rise. High yield securities may be more volatile, be subject to greater levels of credit or default risk, and may be less liquid and more difficult to sell at an advantageous time or price to value than higher-rated securities of similar maturity.
Copyright © iShares
Tags: asset class, Barclays, Corporate Bonds, Correlation, Correlations, Credit Crisis, Credit Quality, Emerging Market, Emerging Markets, Fixed Income, Government Bonds, High Yield Bond, High Yield Bonds, International Equities, Ishares, Market Volatility, Markets Index, Sovereign Bonds, Time Period, Treasuries
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US Utilities: Don’t Overpay for Yield
Wednesday, July 25th, 2012
by Russ Koesterich, Chief Investment Strategist, iShares
As short-term interest rates remain at or close to zero, investors starved for income should be wary of overpaying for yield, particularly when it comes to US utilities.
As I write in my new Investment Directions monthly commentary, I continue to prefer dividend funds and the global telecommunications sector for investors searching for yield. But some segments of the market – such as US utilities — are looking expensive and should likely be avoided.
I continue to hold an underweight view of US utilities for two reasons:
1.) Valuation: Investors have pushed US utility stocks up too far as US utilities currently look even more expensive than they were back in January. US Utilities are currently trading at nearly 15x earnings, versus an average since 1995 of around 14.5x. And the stocks are even more expensive when you compare their valuation to the broader market. As a regulated industry, utilities typically trade at a discount to the broader market. Since 1995, US utilities have traded at an average discount of roughly 25% to the S&P 500. Today, however, US utilities are currently trading at a more than 8% premium, the largest since late 2007.
2.) Profitability: The premium can’t be justified by US utilities being more profitable than in the past. In fact, the US utilities industry is currently less profitable than its long-term average. Return on earnings for US large cap utility companies is currently 10.5%, the lowest level since 2004.
So why are investors paying a near 10% premium to invest in a sector whose profitability is close to an eight-year low? The answer: US utilities have benefited from investors’ flight to safety and flight to yield. To be sure, if the market experiences a major correction, US utilities would likely outperform given their low beta (a measure of the tendency of securities to move with the market at large). However, absent a major correction, I believe a combination of stretched valuations and lackluster profitability suggests that US utilities are likely to continue to trail the market, even in a slow growth environment.
As I wrote in a recent post, my preferred vehicles for seeking yield are dividend paying equities, such as the iShares High Dividend Equity Fund (NYSEARCA: HDV), given its low beta and quality screen; the iShares Dow Jones International Select Dividend Index Fund (NYSEARCA: IDV) and the iShares Emerging Markets Dividend Index Fund (NYSEARCA: DVYE). For investors willing to take the added risk of sector exposure, I like the iShares S&P Global Telecommunications Sector Index Fund (NYSEARCA: IXP).
And for investors still looking for exposure to utilities, I continue to hold a neutral view of global utilities, particularly international ones available through the iShares S&P Global Utilities Index Fund (NYSEARCA: JXI).
Source: Bloomberg
Russ Koesterich, CFA is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog. You can find more of his posts here.
The author is long HDV, IXP, IDV
Investing involves risk, including possible loss of principal. In addition to the normal risks associated with investing, narrowly focused investments typically exhibit higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.
There is no guarantee that dividends will be paid.
Tags: Amp, Beta, Cap, Chief Investment Strategist, Dividend Funds, Earnings, Global Telecommunications Sector, interest rates, Investment Directions, Investors, Ishares, Nbsp, Profitability, Russ, Segments, Tendency, Term Interest, Utilities Industry, Utility Stocks
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A Brief History of Bond ETFs
Thursday, July 19th, 2012
by Matt Tucker, iShares
With the volume of headlinesthat bond ETFs capture these days, it’s easy to take for granted the fact that these innovative products haven’t been around that long. In fact, it was ten years ago this month that iShares launched the first bond ETF (the iBoxx Investment Grade Corporate Bond ETF – LQD), along with three others.
At the time, there was certainly a business case for developing a new way to access fixed income. The over-the-counter (OTC) market – where traditional fixed income instruments trade – can be opaque, hard to navigate, and prone to unnecessarily high expenses (I’ve talked about this at length here on the blog). Putting bonds into an ETF vehicle would give investors the best of both worlds: targeted bond exposure with exchange liquidity and transparency.
Although the idea clearly had merit, there were still some questions about how it would all work. Was it possible to put the OTC fixed income market on the exchange? How would liquidity be created for these products? What would a hybrid bond-equity product look like? Bonds had been listed on the NYSE and other exchanges for years, but had never garnered much interest from traders or investors. Would an ETF suffer the same fate?
Over 500 funds and $290 billion in assets later, the global fixed income ETF market’s success speaks for itself. So what were some of the key developments that brought us from those first four funds launched in 2002 to the plethora of bond ETFs available today? As I see it, there were three main stages that accounted for the market’s exponential growth:
- Creating a new market (2002-2006). In the first few years of fixed income ETFs, there were still only a handful of funds available, with slow and steady growth and usage by investors. Since the building and launching of these funds required a re-thinking of the ETF structure itself, only one other provider outside of iShares was willing to take the bet. By the end of 2006, there were still only six fixed income ETFs available with about $20 billion in assets. However, we knew it was only a matter of time before the concept would catch on.
- Additional providers enter the market (2007-2008). By 2007, there was a growing understanding that the “experiment” had in fact worked. The steady growth and acceptance of the fixed income iShares line-up had proven that there was investor appetite for buying bonds on an exchange. More importantly, investors were hungry for more. When the SEC standardized the fund structure and listing process for FI ETFs, a flood of new funds entered the market. By the end of 2008, the size of the market had almost tripled to $56 billion in assets, spread across 61 FI ETFs from eight providers.
- The hunt for liquidity accelerates usage (2009-2012). During the financial market implosion at the end of 2008, trading volume in markets like corporate bonds fell by as much as 50%. Why? Liquidity in the bond market is supplied by broker/dealers, and since many of these firms were struggling to stay afloat, they pulled back from making markets in bonds. Because of this, many investors discovered an alternative way to access bonds – through fixed income ETFs. FI ETF trading volumes spiked, increasing 800 to 1000% for some funds. And with increased volumes came increased asset flows and even broader investor usage.
Where does the fixed income ETF industry go from here? We believe the market should continue to grow for several reasons. First, changing demographics in the US and abroad are going to result in more and more investors seeking income-producing investments, and since ETFs provide an efficient way to access fixed income, they should benefit significantly. Second, as global bond markets continue to evolve, increasing the investment opportunity set for investors, vehicles like ETFs that allow them to access challenging markets are likely going to be a vehicle of choice. And finally, ETFs are still being discovered by many investors. Despite all the growth of the past ten years, the ETF market is still tiny compared to the individual bond and mutual fund markets.
Given that ETFs are not just another way to buy fixed income, but are transforming the fixed income markets themselves, the sky is the limit for these game changing products.
Matt Tucker, CFA is the iShares Head of Fixed Income Strategy and a regular contributor to the iShares Blog. You can find more of his posts here.
Bonds and bond funds will decrease in value as interest rates rise.
Tags: Best Of Both Worlds, Bonds, Brief History, Business Case, Corporate Bond, ETFs, Exponential Growth, First Few Years, Fixed Income Instruments, Fixed Income Market, Handful, Innovative Products, Ishares, Key Developments, liquidity, Lqd, Matt Tucker, Nyse, Otc Market, Plethora
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Follow the ETP Flows: Corporates Rule
Wednesday, July 18th, 2012
by Dodd Kittsley, CFA, iShares
One of the advantages to working for the largest exchange traded product (ETP) provider in the world is that you have a lot of data at your disposal. In my role as the Global Head of ETP Research for BlackRock, I deal in data every day, particularly as it relates to the in- and outflows of the 4500+ global ETPs currently in existence. As you can imagine, examining flows can be a great way to spot investment trends, take the temperature of the market and reveal sentiment shifts.
Right now, for example, global ETPs just experienced their largest first half inflows ever. ETPs attracted net new assets of $105 billion during the first half of 2012, representing a 16% increase on the $90.6 billion of flows posted during H1 2011. Total industry assets now stand at nearly $1.7 trillion.
Not surprisingly, fixed income ETPs were a main driver of growth. As global markets continue to be volatile, investors have increasingly been using these products to capture new and diversified sources of income. Fixed income ETPs attracted 41% of all inflows with $42.0 billion on the year, or 114% above 2011’s comparable YTD figure of $19.6bn. In fact, June was the 18th consecutive month in which global fixed income ETPs have attracted net inflows. Total assets invested in fixed income ETPs now exceed $300 billion and account for over 18% of total industry assets.
But here’s something you might not have guessed – within fixed income, investment grade corporate ETPs were the clear leader, bringing in $15.5 billion. Throughout this year, investors have consistently committed new money to the category, with monthly flows ranging from $1.7bn to $3.2bn. It appears that many investors may agree with Russ K’s feeling that investment grade debt is the place to look for relative safety (albeit less than Treasuries) with the opportunity for positive real yield.
So what do we think is in store for the second half of the year? Well, if volatility remains an issue (and Russ K believes it will), we expect to see the flows into fixed income ETPs continue (see chart below). In fact, if they continue to follow their current trajectory, FI ETPs could actually sextuple their assets over the next 10 years – from $300 billion to $2 trillion. As my colleague and fellow blogger Matt Tucker has said many times, investors are starting to realize that fixed income ETPs are simply a better way to invest in bonds.
Fixed Income Cumulative Net New Asset Trends
Never one to keep a good story to myself, I’ll be sharing interesting ETP flow data and related insights on a regular basis here on the iShares blog. And I’d love to hear from all of you – what questions do you have that our data might be able to answer?
Source: BlackRock Investment Institute
Tags: Assets, Blackrock, Cfa, Corporates, Diversified Sources, Dodd, Etps, Fixed Income Investment, Global Head, Global Markets, Investment Trends, Ishares, Nbsp, New Money, Relative Safety, Russ, Second Half, Sentiment, Treasuries, Trillion
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