Fixed Income ETFs: The Good, The Bad and The Ugly

Transcription

1 Fixed Income ETFs: The Good, The Bad and The Ugly Elisabeth Kashner, CFA, Moderator Senior Vice President of Analytics, IndexUniverse Anthony B. Davidow, CIMA, Panelist Managing Director, Portfolio Strategist, Guggenheim Investments Scott Eldridge, CFA, Panelist Managing Director Portfolio Management, Caprin Asset Management Matthew Tucker, CFA, Panelist Managing Director, BlackRock

2 Fixed Income ETFs: The Good, The Bad and The Ugly Elisabeth Kashner, CFA Moderator Senior Vice President of Analytics IndexUniverse

3 Matthew Tucker, CFA Panelist Managing Director BlackRock Anthony B. Davidow, CIMA Panelist Managing Director Portfolio Strategist Guggenheim Investments Scott Eldridge, CFA Panelist Managing Director Portfolio Management Caprin Asset Management

4 Bonds Bond Funds Diversification Economies of Scale Stable Cash Flow Market Risk Concentration Risk Expensive to Trade

5 Fixed Income Vehicles Predictable Cash Flows/Stable Principal Diversification Market Risk Economies of Scale? Liquidity Individual Bonds Yes No Client's choice No OTC (mostly) SMAs Client's choice Client's choice Client's choice Parital Negotiated ETFs No Yes Yes Yes Exchange Mutual Funds No Yes Yes Yes End-of-day Closed-End Funds No Yes Yes Yes Exchange

6 Fixed Income ETFs: The Good, The Bad and The Ugly Matthew Tucker, CFA Panelist Managing Director BlackRock

7 Maturity Fixed Income ETF Portfolio Construction Benchmark is divided into subsets (cells) based upon relative risk factor parameters Government Bonds Mortgage-Backed Securities Credit and Asset-Backed Securities Sector Sector/issue type Issuer (GNMA, FNMA, FHLMC) Sector/issue type Maturity Mortgage type (30 yr, 15 yr, balloon) Maturity/ average life Call features Coupon Call/payment structure Vintage (year of issuance) Credit rating Portfolios are constructed by sampling bonds from each index cell Cell BBB-rated Industrial 7 10 years maturity FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION For illustrative purposes only.

8 Fixed Income ETFs Allow Investors to Trade Bonds Like Stocks Fixed Income markets Equity markets Broker A Customer A Broker B Customer B FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION

9 The Layers of Fixed Income ETF Liquidity Secondary Market ADV Observable On Screen Volume ETF Market Depth MARKET MAKER INDICATIONS OF LIQUIDITY Contingent Liquidity Primary Market CREATION/REDEMPTION LIQUDITY (UNDERLYING BASKET) Underlying bond market FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION For illustrative purposes only.

10 Premium / discount (%) HYG price ($) Price Discovery in Action High Yield Average premium: 63 bps Source: BlackRock and Bloomberg as of March 15, There can be no assurance that an active trading market for ETF shares will develop or be maintained. Past performance does not guarantee future results. See slide 7 for standardized performance of the ishares iboxx $ High Yield Corporate Bond Fund (HYG). FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION

11 Are the Market Prices Leading NAV, or NAV Leading Prices? Statistical analysis of ETF market prices and NAVs suggest a cointegrated relationship Implies the ETF market price may lead index values and NAVs ETF market price contains information content with respect to the level and path of the underlying bond market Half-life (days) convergence between market price and NAV Ticker Category September 2008 September 2009 September 2009 September 2010 September 2010 September 2011 AGG Intermediate multi-sector BND Intermediate multi-sector HYG High-yield JNK High-yield MUB Intermediate municipal SHM Short municipal LQD Intermediate investment-grade TLT Long US treasury Source: BlackRock from September 30, 2008 September 30, FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION

12 Standardized Performance as of June 30, 2012 Ticker ishares iboxx $ Yield Corporate Bond Fund HYG Inception date April 04, 2007 Total ret 1-year (qtr-end) 8.05 Total ret annlzd 3-year (qtr-end) Total ret annlzd 5-year (qtr-end) 7.81 Total ret annlzd 10-year (qtr-end) - Total ret inception (qtr-end) 6.30 Market ret 1-year (qtr-end) 8.30 Market ret annlzd 3-year (qtr-end) Market ret annlzd 5-year (qtr-end) 7.66 Market ret annlzd 10-year (qtr-end) - Market ret inception (qtr-end) 6.29 SEC yield 5.98 SEC yield date 08/17/2012 The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling toll-free iShares ( ) or by visiting Shares of ishares Funds are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION

13 Carefully consider the ishares Funds investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds prospectuses, which may be obtained by calling iShares ( ) or by visiting Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. 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 higherrated securities of similar maturity. The ishares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, BlackRock ). When comparing stocks or bonds and ishares Funds, it should be remembered that management fees associated with fund investments, like ishares Funds, are not borne by investors in individual stocks or bonds. Although market makers will generally take advantage of differences between the NAV and the trading price of ishares Fund shares through arbitrage opportunities, there is no guarantee that they will do so. ishares Funds are not sponsored, endorsed, issued, sold or promoted by Markit Indices Limited nor does this company make any representation regarding the advisability of investing in ishares Funds. is FOR FINANCIAL PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION

14 Fixed Income ETFs: The Good, The Bad and The Ugly Anthony B. Davidow, CIMA Panelist Managing Director Portfolio Strategist Guggenheim Investments

15 Navigating the Spectrum of Fixed Income Securities The Search for Yield in a Low Interest Rate Environment Finding opportunity in the new fixed income environment requires an opportunistic approach LOWER Yield/ Volatility Cash/1-3 Month T-Bills Treasuries Ginnie Mae Bonds (GNMA) Corporate Bonds Commercial Mortgage- Backed Securities (CMBS) Asset- Backed Securities (ABS) High Yield Corporate Bonds HIGHER Yield/ Volatility Source: Barclays Capital. FOR FINANCIAL PROFESSIONAL USE ONLY. NOT TO BE SHOWN OR DISTRIBUTED TO THE PUBLIC.

16 Navigating the Risk Spectrum Duration Risk Managing duration risk is an important consideration for advisors LOWER Yield/ Volatility Cash Floating Rate Securities Shorter-Term (under 5 yrs) Intermediate Term Fixed Income (5-10 yrs) Long-Term Fixed Income (10+ yrs) Higher Duration: Higher Interest Rate Sensitivity HIGHER Yield/ Volatility Source: Barclays Capital. FOR FINANCIAL PROFESSIONAL USE ONLY. NOT TO BE SHOWN OR DISTRIBUTED TO THE PUBLIC.

17 Interest Rates & Credit Quality Managing interest rate risk and credit quality will conintue to be important factors for investors Source: Morningstar FOR FINANCIAL PROFESSIONAL USE ONLY. NOT TO BE SHOWN OR DISTRIBUTED TO THE PUBLIC.

18 Issues for Consideration - Index Methodology Drives the investment exposure May impact the ability of a manager to deliver on the fund s investment objective Can influence the tax efficiency of the ETF

19 Issues for Consideration - Trading Trading Fixed Income ETFs Bid/Ask spreads Depth of the market Utilize limit orders

20 Fixed Income ETFs: The Good, The Bad and The Ugly Scott Eldridge, CFA Panelist Managing Director Portfolio Management Caprin Asset Management

21 Choose Your Path INVEST AT YOUR OWN RISK LQD CLY OPPORTUNITY AHEAD TFI BABS HYG BAB TUZ TIP SHY

22 Variables Currency/Country SPDR Barclays Capital International Treasury Bond ETF (BWX) ishares S&P/Citigroup International Treasury Bond Fund (IGOV) Average Maturity * 9.3 yrs 8.9 yrs Average Duration * Yield to Worst * 1.9% 2.1% Underlying EUR Exposure ** 38% 54% Greece Exposure ** 0% 3.8% Italy Exposure ** 4.7% 8.6% Source: *Bloomberg/Caprin Analytics as of 8/7/12 ** Fund Providers/Bloomberg/Caprin Analytics as of 8/31/11

23 Yield (%). Country Exposure Matters August 31, 2011 to July 31, EUR BWX IGOV Total Return for Period * -1.88% -6.87% * Assumes Trading At Day s Last Price, Not NAV Returns /31/ /30/2011 2/29/2012 5/31/2012 Source: Bloomberg

24 Multiple Variables - BABs PowerShares Build America Bond Portfolio (BAB) SPDR Nuveen Barclays Capital Build America Bond ETF (BABS) Average Maturity 24.7 yrs 27.2 yrs Average Duration Yield to Worst 4.8% 5.1% Underlying CA Exposure 22% 35% Discount 10/14/ % -4.6% Source: Bloomberg/Caprin Analytics as of 8/7/12

25 Yield (%) Small Differences Add Up October 14, 2011 to February 16, BAB BABS Total Return for Period * 7.0% 16.2% * Assumes Trading At Day s Last Price, Not NAV Returns AAA Muni 10 Y Yield /14/ /14/ /14/2011 1/14/2012 2/14/2012 Cal 10Y Spread /AAA Source: Bloomberg

26 Disclosure Caprin is a Registered Investment Advisor with the United States Securities and Exchange Commission and shall not be liable for the improper or incomplete transmission of the information contained in this communication. Caprin Asset Management, L.L.C. does not assume any legal liability or responsibility for any incorrect, misleading or altered information contained herein. This communication is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. You are encouraged to seek the advice of your investment advisor for help determining the applicability to your situation of any information, suggestions or implications referenced herein. Third party research, references thereto, or information selected from are provided for information purposes only and have not been prepared by Caprin Asset Management, LLC. The information contained herein is based upon sources which we believe to be reliable, but no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in the reports. Nothing herein shall be construed as an offer or a solicitation of an offer to buy, sell or otherwise engage in a transaction in the securities or strategy described in this presentation. The presentation is not intended to provide personal investment advice and does not take into account the specific investment objectives, financial situation or particular needs of any specific person. Past performance is not a guarantee of future results.

27 Thank You. Questions?