iShares Core Sterling Corporate Bond ETF: October 2022 update

How it fits in a portfolio

An ETF is a basket of investments that often includes company shares or bonds. They tend to track the performance of an index and trade on stock exchanges, like shares. This means their price changes throughout the day.

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The iShares core sterling corporate bond ETF offers a low-cost option for tracking the performance of the Markit iBoxx GBP Liquid Corporates Large Cap Index. The index offers diverse exposure to investment grade bonds issued in GBP. There are bonds from sectors including industrials, utilities and financials.

An index fund is one of the simplest ways to invest and can be a low-cost starting point for an investment portfolio aiming to deliver long-term growth. ETFs that track corporate bond markets could be used to diversify a long-term global investment portfolio, including those focused on shares or other bonds from regions like the US or Europe.

Manager

The ETF is managed by the BlackRock EMEA Index Fixed Income Portfolio Management Team, led by John Hutson. John joined the firm in 2011 and has over 20 years of experience in the industry. John previously had responsibility for Credit Index Investments within the team.

While John leads the team, each ETF at BlackRock has a primary and secondary manager, though in practice a broader team helps to manage each fund. Within the team, portfolio managers rotate their responsibilities, which gives them experience across different regions like the UK, the US and Europe. This ensures continuity in the way the ETFs are managed, even if there are team changes.

BlackRock also has other teams that trade shares and bonds based across the world. The teams function in different time zones, which means they have access to timely information, and can provide input on market trends and corporate actions. Their global approach helps drive efficient management of their funds, while providing simple and effective tracking options for investors.

Process

This fund tracks the performance of the Markit iBoxx GBP Liquid Corporates Large Cap Index. It does this by investing in almost every bond in the benchmark, but not all. This is known as partial replication. In any index tracker fund, taxes, dealing commissions and the cost of running the fund all drag on performance. To help keep these costs down, the team use cash in the fund to make large purchases instead of lots of small transactions.

The fund also has tracking error targets, which measure how closely it's tracking its benchmark. These are monitored by BlackRock on a daily and monthly basis to ensure the fund is closely following the index.

BlackRock uses securities lending within their portfolios to try and add value for their clients. Securities lending is when funds make short-term loans of its assets (e.g. stocks or bonds) to other providers to incrementally increase returns for investors. However, this can also increase risk.

Since BlackRock’s lending program started, only three borrowers with active loans have defaulted. On all three occasions BlackRock has been able to use the terms of the loans to buy back the assets without any loss to clients.

Culture

BlackRock is currently the largest asset manager in the world, running $8.49 trillion globally as of June 2022. The company was founded by eight partners including current CEO Larry Fink and is known for both active and passive strategies across the world. Employees at BlackRock are encouraged to hold shares in the company so that they are engaged with helping the company perform well and grow. The iShares brand represents BlackRock's family of index tracking and exchange-traded funds.

As one of the world's largest asset managers, and with lots of resource and knowledge under its belt, BlackRock aims to drive further development in this part of the investment market. Being such a large player in the index tracking arena gives BlackRock unique access to the marketplace, which can help reduce trading costs.

The team running this fund also works closely with various equity and risk departments across the business. We believe this adds good support and challenge on how to run the fund effectively.

ESG Integration

BlackRock has offered Environmental, Social and Governance-focused funds for several years, including through its iShares range of passive products. However, it only made a company-wide commitment to ESG in January 2020. Following that announcement, the company promised to expand its range of ESG-focused ETFs, screen some thermal coal companies from its actively managed funds and require all fund managers to consider ESG risks.

BlackRock’s Investment Stewardship Team aims to vote at 100% of shareholder meetings where it has the authority to do so, meaning they vote at around 17,000 meetings on 165,000 proposals each year. The Investment Stewardship team engages with companies, in conjunction with fund managers, and the results of proxy votes can be found on the BlackRock website’s ‘proxy voting search’ function.

The firm has courted controversy in recent years for failing to put its significant weight behind shareholder resolutions aimed at tackling climate change. It responded by committing to be more transparent on its voting activity and providing rationales for key votes. The firm also outlines its work on voting and engagement in annual and quarterly Stewardship reports.

As the iShares Core Sterling Corporate Bond ETF tracks an index of bonds, it does not specifically integrate ESG considerations into its investment process, and the fund therefore has the flexibility to invest in bonds issued by companies that are deemed to be ESG sinners, such as weapons and alcohol producers.

Cost

The fund has an ongoing annual fund charge of 0.20%. This is reasonable compared to other ETFs tracking the Markit iBoxx GBP Liquid Corporates Large Cap Index on the HL platform. Our platform charge of 0.45% per annum also applies. Ensuring a passive fund has a low charge is an important part of tracking the underlying index closely.

As ETFs trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges within any Hargreaves Lansdown account.

Performance

The iShares Core Sterling Corporate Bond ETF has done a good job tracking its benchmark, the Markit iBoxx GBP Liquid Corporates Large Cap Index, since launch. Over the last 10 years the ETF has returned 16.31%* versus the benchmark’s 18.50%. As is typical of index tracker funds, it’s fallen behind the benchmark over the long term because of the costs involved. However, the tools used by the managers have helped to keep performance as close to the index as possible.

The top 10 bonds in the ETF only make up 5.71% of the fund, meaning the performance is spread across a number of different holdings. This should reduce the concentration risk of relying on the performance of a handful of bonds.

With rising interest rates globally, alongside high inflation, bonds have had a particularly difficult time in 2022. Inflation makes bond prices fall because the fixed coupon payments paid by most bonds are worth less in the real world. Similarly, as bonds are typically riskier than putting money into a savings account at a bank, the yields on bonds have risen as interest rates have increased. As bond yields rise, their prices fall.

Over the last year the Markit iBoxx GBP Liquid Corporate Large Cap Index has fallen 23.81%, reflecting the current global economic challenges.

At 31 August 2022, the fund’s yield was 2.49%. Income isn’t guaranteed, and yields aren’t a reliable indicator of future income.

Given BlackRock's size, experience and expertise running index tracker funds, we expect the fund to continue to track the index well in future, though there are no guarantees on how it will perform. A glance at the 5-year table below shows that in some years the fund has tracked its benchmark closer than others. Remember, past performance isn’t a guide to future returns.

Past performance is not a guide to the future. Source: *Lipper IM 30/09/2022. The five-year performance figures to 30/09/2022 are income units of the fund.

More about the iShares Core £ Corporate Bond ETF Fund including charges

iShares Core £ Corporate Bond ETF Fund Key investor information

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