IShares iBoxx $ High Yield Corporate Bond ETF provides broad exposure to US high-yield corporate bonds. But difficulties trading these bonds limit its breadth and hamper the advantages of its market-value-weighted portfolio. 

The fund tracks the Markit iBoxx USD Liquid High Yield Index, which holds the most-liquid portion of the US high-yield corporate-bond market. Eligible bonds must have at least $400 million in outstanding face value and 1.5 years remaining until maturity. There’s also an issuer-level minimum outstanding face value threshold. The index excludes certain types of bonds, including those with equity and convertible features, floating-rate notes, and bonds from emerging-market issuers. It weights bonds by their market value, subject to a 3% cap on issuers’ weighting in the index. 

The resulting portfolio holds a broad and diversified slice of the US high-yield bond market. However, a broad indexing approach leaves much to be desired. The wide return dispersion among the lowest-rated bonds puts it at a disadvantage relative to its Morningstar Category peers. Active managers with more flexibility and sound credit research can use more discretion with riskier bonds to better exploit those that are mispriced. Some managers may take on a small stake in bonds rated BBB to cushion the portfolio during credit shocks. 

The index has some shortcomings. It leaves out the less-liquid portion of the market to alleviate transaction costs, but this limits its opportunity set. And market-value weighting tilts the fund toward the most indebted issuers.

Recent fee cuts from other passive high-yield bond funds make the fund’s 0.49% annual fee less attractive, though it still lands in the cheapest quintile of its category. Despite being cheaper than average, it has struggled to consistently outperform the category average.

Analyst Rating

Analyst

Lan Anh Tran

Difficulty trading high-yield bonds makes indexing a difficult endeavor in this category. This strategy’s rigidity can be a disadvantage because it omits portions of the opportunity set that its active peers can scour for opportunities. The fund earns a Below Average Process rating.

Below Average

Process

BlackRock's fixed-income portfolio managers receive an Above Average People Pillar rating, reflecting the size and experience of its management team and its robust support system. This well-structured team has portfolio managers who specialize in specific sub-asset classes, ensuring in-depth research and expertise in their respective sectors. A global team of traders executes all trades and complements managers' specialization. A separate index analytics team provides crucial support for navigating corporate actions and index changes.

The management process benefits significantly from automation and the use of BlackRock's Aladdin platform, which streamlines many operational tasks and helps prevent errors. The managers skillfully match a portfolio’s key risks to those of its target index, a necessary action because most fixed-income indexes cannot be fully replicated. They also have the discretion to make strategic decisions within allowable tolerances when they identify opportunities to add value. Risk management is a top priority. An independent risk team provides rigorous oversight and sets tracking targets that it reviews regularly. This approach underscores the team's commitment to accurate index-tracking performance and proactive risk control.

Above Average

People

BlackRock offers compelling options across asset classes and vehicles. It earns an Above Average rating for Parent. 
The firm’s approximately USD 8 trillion in assets under management, as of Sept. 30, 2022, gives it unparalleled scale and influence. It is a market-leading index fund provider globally, and its iShares exchange-traded fund franchise offers a low-cost lineup of core funds that investors can use to build a well-diversified portfolio for dirt cheap. The firm can be more adventurous in its ETF launches than some peers, so not everything it launches is appropriate for the masses. As a result, it is likely to have more ETF closures than peers that stick to the basic building blocks.  
The firm’s active fixed-income and multi-asset efforts also stand out as some of the best in the industry. Those benefit from BlackRock’s commitment to building a first-class risk management system via its Aladdin analytics software. The software is also available for sale to other firms and has proved to be a popular option for competitors, a testament to its usefulness. 
More recently, the firm has shifted its focus to ESG offerings and incorporating ESG across its investment lineup, leading to a political backlash in the United States.
BlackRock isn’t the best at everything it tries to do, but retail investors, financial advisors, and large institutions could all build robust portfolios using BlackRock’s products.

Parent

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