The next wave of fixed-income ETFs from iShares will take the middle ground when it comes to active versus passive ETFs.
BlackRock Inc.'s exchange-traded-fund arm has two fixed-income ETFs in the works that will not track underlying indexes, which makes them technically actively managed, according to the Securities and Exchange Commission. Instead, they will use a rules-based methodology, meaning portfolio managers won't actively pick bonds, according to a prospectus filed with the SEC. Although the ETFs will not track an index, and the exact rules the fund will follow are not disclosed in the initial filing, the funds will still disclose holdings daily.
“There are different levels of active management,” said Timothy Strauts, fixed-income ETF analyst at Morningstar Inc. “It seems like they're trying to differentiate themselves from Bill Gross and his really active strategy by saying there will be rules the ETFs follow, but if you're going to follow the rules, why not just put it into an index?” he asked. Mr. Strauts said that Morningstar likely will classify the ETFs as active when they are launched, because they don't follow indexes.
Mr. Strauts mentions Mr. Gross because the Pacific Investment Management Co. LLC's co-founder put actively managed ETFs in the spotlight last week with the launch of the highly anticipated Pimco Total Return ETF (TRXT) and one of the upcoming iShares ETFs will be in direct competition with Pimco's biggest active ETF.
The iShares Ultrashort Bond Fund will focus on the investment opportunities between what money markets can invest in and the short-term Treasury market, similarly to the $1.4 billion Pimco Enhanced Short Maturity Strategy ETF (MINT), currently the largest actively managed ETF.
“MINT has been the most successful actively managed ETF, so clearly, there's a lot of demand for that type of strategy,” said Timothy Strauts, an ETF analyst at Morningstar.
The iShares Sovereign Screened Global Bond Fund will be the first ETF to include both developed and emerging-markets government debt in the same product. The holdings will be based on “a proprietary model that scores countries using a comprehensive list of relevant fiscal, financial and institutional metrics to assess sovereign credit risk,” according to a filing with the SEC.
The launch of the Pimco Total Return ETF (TRXT) and iShares' unveiling of its next fixed-income ETFs come at an ideal time, as fixed-income ETFs have never been more popular. Last year, investors poured $43 billion in new money into fixed-income ETFs, more than double the amount of inflows the products had in 2010, according to Morningstar
Christine Hudacko, spokeswoman for iShares, declined to comment while the ETFs are in registration.