Just like water is essential to life on earth, bonds are essential to your investment portfolio.
But the nature of the bond market makes buying and selling individual bonds a challenge for many financial advisors. Most advisors face three key challenges when managing individual bonds: 1) being flooded with operational tasks, 2) limited liquidity and 3) lack of diversification.
At BlackRock, we believe that adding bond ETFs to your individual bond portfolios can help solve each of these challenges.
Let’s find out how…
As an advisor, choosing individual bonds for your clients may be an important part of your practice.
However, it requires keeping track of cash flows, conducting credit research, and executing trades.
Which is perfectly manageable when doing this for one client…but imagine doing this for 10….20…or 100 clients.
At some point, you’ll be flooded with a tidal wave of tasks, which aren't scalable
Bond ETFs are a more scalable and easily repeatable solution – they can help you manage positions more consistently across multiple client portfolios and cut down on the time you spend on operational tasks.
Unlike bonds that need to be individually traded over the counter, bond ETFs allow you to trade a basket of hundreds of bonds throughout the day on exchange in a single transaction. This makes them a more efficient and flexible solution for scaling your practice.
We saw the limited liquidity of individual bonds firsthand during early 2020 when investors had difficulty trading bonds across all fixed income asset classes.
Again, bond ETFs can provide an efficient solution here. Because they trade on exchange they offer intraday liquidity. Crucially, bond ETFs have stood the test of time during times of volatility and bond market stress…historically providing more liquidity than the underlying bond market.
In fact, on March 12th, one of the worst days for U.S. stocks, the iShares Investment Grade Corporate ETF, LQD, changed hands almost 90,000 times – 2,000x more than its top five corporate bond holdings which traded an average of only 37 times. That's why more than half of institutional investors ended up turning to bond ETFs when seeking liquidity during the market turmoil of 2020.
We never know what’s on the horizon. Sometimes, there’s a rainy day ahead — and your client’s portfolio needs to have enough diversification to weather the storm.
Bond ETFs hold hundreds, sometimes thousands of bonds in one single ticker which immediately provides diversification in your bond portfolios.
You’d have to own 100s of individual bonds to get similar exposure.
So, how do you get started with bond ETFs? We see two ways…
First, you can pair your existing bonds with an ETF liquidity sleeve. A liquidity sleeve is a percentage of your bond portfolio – say 10, 20, or even 30% depending on your liquidity needs – that will stay fully invested…but that can be easily sold and converted to cash should you need to re-position your portfolio.
Bond ETFs are an efficient vehicle to use due to their liquidity and the wide range of exposures that they offer investors. iShares offers over a hundred different bond ETFs that can be used to build out your liquidity sleeve, like....
LQD for corporate bonds.
MUB for municipal bond.
...and AGG for broad, investment grade bonds.
Lastly, for advisors running individual bonds ladders, iBonds ETFs can help you build bond ladders at scale.
iBonds ETFs are designed to mature like a bond, trade like a stock, and diversify like a fund.
These ETFs hold a diversified portfolio of bonds with similar maturity dates. So you can use them to create new bond ladders…or plug holes in existing ladders when bonds mature or get called…or even use them to simply reinvest coupons from your existing bonds.
They’re available across various maturity years and exposures including investment grade corporates, municipals, U.S. Treasuries, and high yield and income bonds…so you can use them to replace or complement a wide variety of individual bonds in your bond ladders.
Whichever way you choose to integrate your ETFs… they can help alleviate the challenges around running individual bond ladders, calming' the tidal wave of operational complexity... Adding liquidity…And providing diversification.
To learn more about integrating bond ETFs into your individual bond portfolio, check out the BlackRock advisor center or reach out to your BlackRock representative.
Visit www.iShares.com for a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal.
