Investors have embraced taking on credit risk recently but industrywide have also favored actively managed ETFs. With its latest active offering, BlackRock seeks to tap into both trends.
BlackRock already offers the two largest high yield bond ETFs. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG ) has $18 billion in assets, boosted by $2.5 billion in the last 30 days. Meanwhile, the iShares Broad USD High Yield Corporate Bond ETF (USHY ) manages $13 billion aided by $1.1 billion of net inflows since mid May.
USHY has relatively broader appeal to a retail audience with its 0.08% expense ratio. In contrast, the 0.49% fee for HYG is less meaningful to institutional investors that favor the ETF’s high liquidity.
BlackRock Leverages a Strong Active Team
However, the firm has added an active offering based on a $22 billion mutual fund. The BlackRock High Yield ETF (BRHY) began trading today on the Nasdaq charging a 0.45% fee.
The fund is managed by David Delbos and Mitchell Garfin. It has the same investment objective, benchmark, and portfolio managers as the BlackRock High Yield Fund (BHYIX). BHYIX is a Morningstar four-star fund that was in the top quartile on a one-, three-, five-, and 10-year total return basis.
“A nimble investment approach is essential to navigating today’s shifting credit conditions,” said David Delbos, co-head of U.S. Leveraged Finance at BlackRock. “By delivering alpha opportunities through the ETF wrapper, we aim to capture the upside in rallying markets while protecting assets when high yield markets decline.”
Relative to index-based HYG, actively managed BHYIX recently had more exposure to securities rated B (48% of assets vs. 34%). It had less exposure to those rated BB (30% vs. 53%).
Supply of Active ETFs Wanted by Advisors
During a mid-June webcast with John Hancock, VettaFi asked advisors a series of questions. One of them was, “What has been your biggest challenge to integrate ETFs into your fixed income asset allocation model?”
Excluding the people who said they currently use fixed income ETFs (35%), the most popular answer was “availability of quality fixed income managers within an ETF” (29%). An additional 24% wanted to “blend active and passive philosophies”.
Bringing Best and Brightest
We think as more asset managers like BlackRock bring their best and brightest managers and partners into the ETF space, active ETF adoption will further accelerate. Investors poured $20 billion into actively managed ETFs in May, representing 21% of the industry’s cash haul. This continued a yearlong trend. In the first five months of 2024, active ETFs gathered 29% of the net inflows. This is impressive to us given that active is just 7% of U.S. ETF assets.
The BlackRock Flexible Income ETF (BINC ) has been a popular active fixed income ETFs. The multisector fund run by Rick Rieder already gathered $2.7 billion of new money in 2024. It will be interesting to see how BlackRock educates advisors about the differences between its index-based and active high yield offerings.
“We consistently hear from our clients that they want access to our leading portfolio managers through the ETF wrapper,” explained Steve Laipply, global co-head of bond ETFs at BlackRock, in an emailed statement. “With BRHY, clients can now access BlackRock’s leading active high yield capabilities in their wrapper of choice, whether that be open-end mutual funds, SMAs, index ETFs, and now an active ETF. Because of the breadth of our platform, investors can now pair, as an example an index high yield ETF with an active HY ETF, to obtain even more robust portfolio construction.”
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