Before heading up BlackRock’s iShares Institutional business three years ago, I spent my days immersed in the analysis and management of fixed income assets from US High Yield debt to Canadian investment grade corporate bonds. Through my years on the buy-side in the hair raising high yield markets during the Tech Wreck to my time on the Sell-side during the Credit Crunch, I’ve witnessed first hand the need for liquidity, flexibility and the benefits of diversification within any sized portfolio. In the rollercoaster days of 2011, institutional asset managers now have fixed income liquidity tools available to them that they could have only prayed for back in 2001.

After the market turbulence of recent years, investors of all ages turned towards fixed-income investments. Here’s why.

In the wake of the 2008 stock market turmoil, many investors, unnerved by swings in the value of their stocks, searched for alternatives to buying equities. Over the past two years, there was a surge of interest in fixed-income investments, which return income to their owners but generally don’t appreciate in value substantially (as stocks can). Such fixed-income investments include Government of Canada bonds, bonds issued by corporations, provincial bonds, annuities, and money-market funds. Many of these instruments can be bought within fixed-income exchange traded funds (ETFs), which have seen major growth in the past two years; (see chart below), fixed-income ETF assets increased by 78% in 2009 and an additional 21% in the first six months of 2010.

To some readers, fixed-income investing might sound like something only relevant for retirees or people nearing retirement — after all, it is generally thought of as a conservative, more predictable approach than investing in equities but offering less potential upside. And it’s true that many investors who no longer receive a paycheque rebalance their portfolio, de-emphasizing more aggressive growth assets in favour of those that primarily generate income. They’ve been saving for retirement, and they need cash for living expenses. It’s also true that we’re likely to see even more of this in the imminent future: millions of baby boomers are now starting to retire, and they’ll be looking at fixed-income investments in the hope of providing themselves an income stream while diminishing the level of risk in their portfolio.

But retirement needs aren’t the only reason why an increasing number of investors, regardless of where they are in life, are devoting a portion of their portfolios to fixed-income investments. Fixed-income investments can add diversity to portfolios, always an important element of portfolio management. Finally, as I mentioned before, many investors moved away from equities toward more predictable investments after the stock market upheaval of 2008 and early 2009.

There’s just one problem: The yield on many fixed-income investments aren’t very high right now. At the moment, many traditional fixed-income investments are offering such low yields, they don’t seem very appealing. Yet there are still good reasons to consider fixed-income, especially when combined with the low fees and diversifying impact of exchange traded funds (ETFs).

Canada Fixed Income ETF Net New Flows (C$ billions)

Canada Fixed Income ETF Net New Flows (C$ billions)

Fixed-income ETFs hold significant potential for all investors, from institutions to financial advisors to self-directed individual investors, who are all using them in increasingly sophisticated ways. Today, the fixed-income ETF market includes thriving and diverse sectors that allow investors to enhance portfolio performance, mitigate risk and improve efficiency. Plus, the liquidity that fixed-income ETFs can achieve, along with two-sided pricing transparency, is attractive to investors looking to gain expedient, tactical exposure.

Many fixed-income ETFs have developed a robust level of exchange liquidity apart from the underlying bond market. For this reason, they have come to be recognized as dependable investment vehicles for institutional and retail investors alike. For example, during the recent economic crisis when credit markets were frozen, fixed-income ETFs continued to trade and provided a price discovery mechanism that reflected market risk and investor sentiment. Although at significantly decreased prices, fixed-income ETFs continued to trade even as bond markets seized.

Fixed-income ETFs continue to grow rapidly in assets and familiarity. With the ETF structure, investors can get swift fixed income exposure in transition management, cash deployment, tactical allocations and more.

Institutional investors, particularly levered relative-value investors such as hedge funds, and long-only investors such as mutual funds and pension funds, have found that index-based fixed-income ETFs offer rapid, efficient allocations to specific fixed income sectors. Based on market views, such investors may quickly increase or decrease beta exposures to target sectors more precisely and efficiently through ETFs than could otherwise be accomplished using the underlying OTC bond or derivative markets. The instantaneous diversification provided by fixed-income ETFs make this application relevant even for the most novice retail investors.


Source: BlackRock Asset Management Canada Limited:

* * *

iShares® Funds are managed by BlackRock Asset Management Canada Limited. Commissions, management fees and expenses all may be associated with investing in iShares Funds. Please read the relevant prospectus before investing. The funds are not guaranteed, their values change frequently and past performance may not be repeated. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.

©2011 BlackRock Asset Management Canada Limited. All rights reserved. iShares® is a registered trademark of BlackRock Institutional Trust Company, N.A. Used under license. BlackRock® is a registered trademark of BlackRock, Inc. Used with permission. All other trademarks, service marks or registered trademarks are the property of their respective owners.