ETF Mechanics

Fixed Income ETFs are portfolios of cash bonds that trade on an equity exchange. In this way, fixed Income ETFs offer the ease of trading of a stock with the diversification benefit of a portfolio of bonds.

How Fixed Income ETFs are Created

The supply of fixed income ETF shares on an equity exchange is determined by a unique mechanism called the creation/redemption process.

  • iShares partners with broker-dealers who help maintain ETF liquidity in the market and facilitate the process of creating or redeeming shares of ETFs.
  • When an investor wants to buy an ETF, a broker/dealer can fill the order with its available inventory. Buying shares of the ETF often results in lower spread and impact costs for the investor versus buying the individual bonds themselves.
  • If the broker/dealer does not have any ETF inventory, it can purchase the bonds that make up the ETF in the OTC market and exchange them with BlackRock for new ETF shares.
  • The broker/dealer will then deliver the ETF shares to fill the investor’s order.

Fixed Income ETF Price Behavior and NAV

The price at which an ETF trades is primarily a function of the value of the underlying securities in the portfolio. It is also influenced by market flows, liquidity, and market volatility.

  • The net asset value (NAV) of an ETF is equal to the total fund assets divided by the total shares outstanding.
  • When an ETF trades at a price above the NAV, it is said to be trading at a premium; when the ETF is trading below the NAV, it is said to be trading at a discount.
  • The market price of the ETF will generally fluctuate between the bid and offer price of the underlying bonds as the fund trades through the day.
  • The creation of ETF shares helps balance supply and demand, which brings the NAV and the ETF price into alignment.

Comparing and Translating Fixed Income ETF Price Quotes

Bond market participants quote securities in a variety of ways, including using dollar prices, yields, and spreads.

  • Fixed income ETFs are exchange traded and quoted in price terms like equity securities.
  • The graphic to the right provides a framework for the interpretation and comparison of bond and fixed income ETF quotes.

Fixed Income ETF Management and Rebalancing Process

The primary goal of an Index ETF is to track the fund’s designated benchmark. The portfolio management process is ongoing process that attempts to balance tracking error and transaction costs.

  • Most fixed income ETFs are constructed through sampling, which means that the ETF holds a subset of securities that together best track the benchmark index.
  • An ETF that is sampled can help reduce the transactional costs necessary to keep the ETF tracking its index.
  • On a monthly basis, most fixed income ETFs are rebalanced to take into account cash flows and underlying benchmark changes.
  • The rebalancing process accounts for new issuance, maturities, bonds no longer in the maturity range, calls or refinancing, defaults, and downgrades or upgrades.

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares ETF and BlackRock Fund prospectus pages. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency and its return and yield will fluctuate with market conditions.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries.

There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

Buying and selling shares of ETFs will result in brokerage commissions.

Shares of the iShares Funds may be bought and sold throughout the day on the exchange through any brokerage account. Shares are not individually redeemable from the Fund, however, Shares may be redeemed directly from a Fund by Authorized Participants, in very large creation/redemption units.

When comparing stocks or bonds and iShares Funds, it should be remembered that management fees associated with fund investments, like iShares Funds, are not borne by investors in individual stocks or bonds.

Actively managed funds do not seek to replicate the performance of a specified index. Actively managed funds may have higher portfolio turnover than index funds.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Barclays, Bloomberg Finance L.P., Cohen & Steers Capital Management, Inc., European Public Real Estate Association (“EPRA® ”), FTSE International Limited (“FTSE”), India Index Services & Products Limited, Interactive Data, JPMorgan Chase & Co., Japan Exchange Group, MSCI Inc., Markit Indices Limited, Morningstar, Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), New York Stock Exchange, Inc., Russell or S&P Dow Jones Indices LLC. None of these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above.


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