New ETF firm wants to shake up fixed-income investing

A group of former BlackRock Inc. players is tapping into booming demand for credit ETFs with products targeting specific industry sectors -- bringing a new level of precision to fixed-income investing.

Launching on Thursday, BondBloxx Investment Management plans to create seven exchange-traded funds that carve up the U.S. high-yield debt market. That’s a common practice in equities, but rare in corporate bonds. 

It comes as new ETF technology disrupts the traditional, human-based methods of trading and pricing debt.

BondBloxx has been founded by industry heavy-hitters who held senior roles at the likes of JPMorgan Asset Management and State Street Corp., in addition to BlackRock, and who collectively have launched 350 ETFs. The idea is to fill the space between individual company bonds and the broad exposures offered by most funds. 

“If you look at how fine the equity landscape has been cut, there is simply not the same level of precision in fixed income,” said Leland Clemons, a member of BondBloxx’s founding team and the former global head of markets at BlackRock iShares. “The gap between individual securities and broad-based exposures is very large.”

Until now, the few sectoral fixed-income ETFs that exist have been dominated by products targeting debt issued by financial companies. The first BondBloxx ETFs will also hone in on securities sold by those in the industrial, telecommunication, health care, energy, consumer cyclical and consumer noncyclical segments.

BondBloxx, which filed for the funds in August, declined to comment on when they might start trading. 

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CARVING CREDIT

While the proposed products may bring a new level of specialization to the market for bond ETFs, their success is by no means assured. 

Company debt is typically harder to slice and dice than stocks given the sheer volume of different securities -- a single issuer could sell multiple notes with differing structures and durations. Both diversification and liquidity can become more challenging as the focus of a strategy narrows.

The Emles Real Estate Credit ETF (ticker REC) is one of the few existing examples of a sector credit ETF. It turns one year old this month, but has attracted less than $5 million in assets after losing 0.9% in 2021 so far.

Nonetheless, newcomer BondBloxx sees a gap in an industry dominated by large, broad-brush funds. It plans to use constituents of the ICE BofA U.S. junk bond index, which tracks about 2,100 bonds, to fill its ETFs. 

The U.S. market for fixed-income ETFs has grown to almost 500 funds managing more than $1.2 trillion, according to data compiled by Bloomberg. About 150 ETFs specifically target corporate bonds, with the largest covering huge chunks of the market, like iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). Most others focus on specific maturities or structures, like the Vanguard Intermediate-Term Corporate Bond ETF (VCIT).

The growth of the industry accelerated after the Federal Reserve backstopped the market during the worst of the pandemic sell-off, while the need to work from home also increased the electronification of the bond market. As a result, portfolio trading  -- a tech-powered method of trading many bonds in one go, usually using ETFs -- is booming. 

With technology taking over more old-school methods of trading bonds, BondBloxx sees more opportunities ahead.

Most of the firm’s founders have at some point worked for BlackRock, the world’s largest ETF issuer. They include Joanna Gallegos, most recently head of global ETF strategy at JPMorgan Asset Management, Elya Schwartzman, Mark Miller, former head of institutional sales for the Americas at HSBC, and Brian O’Donnell, previously the head of business strategy at Northern Trust Asset Management. 

“You’ve got a lot more issuers putting their hands up and driving innovation,” Gallegos said. “That focus is going to drive a lot of choice for clients.”

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