iShares expands fixed income ETF offering

iShares has listed two US fixed income ETFs on the London Stock Exchange.

The iShares Markit iBoxx $ High Yield Capped Bond and iShares Barclays Capital US Aggregate Bond are both products which already exist in the US but they have not been easily accessible to European investors.

iShares has launched sister funds in London rather than cross-listing the US versions to ensure that they comply with the Ucits regulations.

Although current risk-averse sentiment means that high yield may not see much immediate demand, Alex Claringbull, fixed income portfolio manager at iShares says that there will be interest in the long-term. "Right now there is probably a sentiment out there to be avoiding risk; clearly at some point that will turn at which point the interest will pick up.

"High yield is an area that clients have asked us about for many years... if you put the European high yield and the US high yield together you get about 96% of global exposure. Certain clients, particularly those who are asset allocators, like that kind of exposure, especially in the world of very low interest rates where people are searching for yield."

The high yield index caps the weighting of each issuer at 3% to avoid over-exposure to any one debt issuer, which has been a criticism of fixed income ETFs whereby market-cap weighted fixed income indices tend to be weighted towards issuers with the most debt.

The US aggregate bond ETF is diversified across US treasuries, mortgages, credit and agencies, Claringbull explains.

For an index like the Barclays Capital US Aggregate Bond Index, it can be difficult for a physically replicated ETF (like these iShares funds) to hold all the underlying components. Claringbull says "we don't launch [ETFs] unless they have enough seed money to do what we say they are going to do, which is to track the index effectively.

"Given the number of bonds in the index we use sampling.... we expect a small amount of tracking error but that is normal in our industry."