Fixed income factors

Factors have changed the way we invest. But did you know that many of the well-known factors that are found in equities also exist in fixed income? Now, investors are exploring how factors can help build better bond portfolios.

Why invest in fixed income factors?

Fixed income factors are well-documented and researched characteristics that help explain historical and potential drivers of bond returns. Using factor-based insights can help improve portfolios in two key ways:

• Better-informed portfolio construction – Analyzing factor exposures can help identify hidden risks in a bond portfolio, like unintended overweights in interest rate or credit risk. Knowing the true drivers of returns can potentially unlock greater diversification and better overall results.
• Improved investment selection – Understanding factors can help uncover fundamental insights that help improve investment selection within asset classes. For instance, factors can help screen for bonds that have a lower likelihood of default or those that appear underpriced — improving total return potential.

Target improved outcomes with fixed income factor ETFs

Factor-based investing can help solve many of the shortcomings in traditional holdings like core bonds, high yield and investment grade corporates.

Seek outperformance at a low cost

Most core or intermediate-term bond portfolios are dominated by interest rate risk. For example, the Bloomberg Barclays U.S. Aggregate Bond Index, while made up of over 9,000 bonds from many different sectors, actually derives 80-90% of its risk from interest rates.² As a consequence, your core bond portfolio may benefit from a more diversified approach to generate returns.

Putting factors to work

Through a factor perspective, it’s possible to go beyond market cap-weighted portfolio construction in an effort to overcome some of the shortcomings of broad bond market indices.

The iShares U.S. Fixed Income Balanced Risk Factor ETF (FIBR) may provide better income potential with lower duration than a typical broad bond portfolio by seeking a better balance between interest rate risk and credit risk.

FIBR has out-yielded AGG with less interest rate risk

BlackRock 30-Day SEC Yields correspond to the following time periods: Current, high, low, and average 30-Day SEC Yields are all calculated based on the period beginning with FIBR's fund inception on 02/24/2015, and ending on 12/31/2020. High for FIBR was as of 12/31/2018, high for AGG was as of 09/30/2018. Low for FIBR and AGG was as of 12/31/2018. Average is the average 30-Day SEC Yield from FIBR's inception on 02/24/2015 to 12/31/2020. Duration is effective duration as of 12/31/2020. Effective Duration measures the sensitivity of the price of a bond with or without embedded options to changes in interest rates, taking into account the likelihood of the bond being called, put and/or sunk prior to its final maturity date while incorporating after-tax impacts on the bond. The options-based duration model used by BlackRock employs certain assumptions and may differ from other fund complexes. Effective Duration is measured at the individual bond level, aggregated to the portfolio level, and adjusted for leverage, hedging transactions and non-bond holdings, including derivatives. FIBR seeks to track the Bloomberg Barclays U.S. Fixed Income Balanced Risk Index, which measures the performance of the corporate and mortgage portion of the Bloomberg Barclays U.S. Universal Index (the index that AGG seeks to track) while targeting an equal allocation between interest rate and credit spread risk. There may be material differences between the funds shown including without limitation investment objectives, expenses, liquidity, holdings, and performance.

Performance data represents past performance and does not guarantee future results. Investment return and principal value will fluctuate with market conditions and may be lower or higher when you sell your shares. Current performance may differ from the performance shown. For standardized performance and performance for the most recent month end for FIBR, click here.

Seek high yield with less risk

High yield bonds are essential to generating above average yields. However, one drawback to investing in high yield bonds is the increased probability of defaults and the accompanying volatility the asset class introduces to a bond portfolio.

Putting factors to work

Using a factor approach, it is possible to invest in high yield with potentially less risk, while still pursuing a similar level of yield and returns. The iShares High Yield Bond Factor ETF (HYDB) seeks to track an index that combines quality and value factors to invest in high yield bonds with a more defensive tilt.

The index of HYDB aims to screen out bonds that appear to be lower quality based on well-researched credit metrics and then overweighs the remaining bonds that appear undervalued. The targeted result is a portfolio with similar income and return potential but with potentially less risk than a market-cap weighted allocation.

How the index is built

For illustrative purposes only.
Based on the methodology of the BlackRock High Yield Defensive Bond Index.

Seek enhanced returns in corporates

Years of low interest rates have kept investment grade bond yields well below historical levels. Now, many bond investors have been forced into a difficult decision – sacrifice yield for the perceived stability of investment grade bonds or reach into historically more risky asset classes.

Putting factors to work

Using fixed income factors, there may be a way to get more from your investment grade bond allocation. Investors seeking income while potentially enhancing returns can consider iShares Investment Grade Bond Factor ETF (IGEB). The index of IGEB aims to deliver better risk-adjusted returns relative to the broader investment grade corporate bond market by using proprietary credit analytics that target high quality and undervalued bonds.

How the index is built

For illustrative purposes only.
Based on the methodology of the BlackRock Investment Grade Enhanced Bond Index.