iShares Global Corporate Bond ETF: February 2023 Update

• BlackRock has been managing index portfolios since 1971
• This ETF provides broad exposure to a mix of global corporate bonds
• The ETF’s low charges should help it track the Bloomberg Global Aggregate Corporate Bond Index Hedged GBP

How it fits in a portfolio

An ETF is a basket of investments that often includes shares or bonds. They tend to track the performance of an index such as the Bloomberg Global Aggregate Corporate Bond Index and trade on stock exchanges, like shares. This means their price fluctuates throughout the day.

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The iShares Global Corporate Bond ETF provides exposure to a range of fixed income investments. Its benchmark, the Bloomberg Global Aggregate Corporate Bond Index Hedged GBP, includes investment-grade bonds across sectors like industrials, utilities and financial companies. This is a currency hedged fund which means overseas currency bonds are converted back to sterling. By using derivatives hedging, investors could experience less extreme price movements over time, which helps smooth returns, but can add risk where used. Derivatives may also be used to manage other exposures within the fund, which also adds risk where used.

A passive fund is one of the simplest ways to invest and can be a low-cost way to add exposure to securities like global corporate bonds. ETFs that track global corporate bonds could help diversify a portfolio focused on other assets, such as shares.

Manager

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

While Hutson 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 Bloomberg Global Aggregate Corporate Bond Index. It does this by investing in a certain proportion of the bonds 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. The fund invests in a range of bonds issued by companies in emerging and developed markets. Emerging markets are often subject to more volatility which means they are higher risk.

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. The company was founded by eight partners including current CEO Larry Fink and is known for both active and passive strategies. 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 the world's largest asset manager, 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 Global 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 ETF currently has an ongoing annual fund charge of 0.25%.

There are no charges from HL to hold ETFs within the HL Fund and Share Account. The annual charge to hold ETFs in the HL ISA or SIPP is 0.45% (capped at £45 p.a. in the ISA and £200 in the SIPP). Ensuring an index 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 ETF aims to track the Bloomberg Global Aggregate Corporate Bond Index and has done so for nearly five years, returning 0.15%* over this time. As expected from an ETF, 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 close to the index. Past performance is not a guide to the future.

Bond markets, including the Bloomberg Global Aggregate Corporate Bond Index Hedged GBP, performed relatively steadily from the ETF’s launch until 2022, which benefited the ETF’s performance.

However, over the past year bonds have faced headwinds, mostly in the form of rising inflation and interest rates, which make the future value and income paid by bonds look less attractive. Over the last year to the end of January, the ETF fell 10.12%.

Bond yields move in the opposite direction to prices, so yields have increased over the course of the year. The yield for the fund was 2.61% as of January 2023. Bond yields are not guaranteed and are not a reliable indicator of future income.

Given iShares’ size, experience and expertise, we expect the ETF to continue to track the benchmark well in the future, though there are no guarantees. As the currency of overseas bonds is hedged back to sterling, we expect the ETF’s performance to be less volatile over time compared to an equivalent unhedged ETF.

A glance at the five-year performance table below shows that the ETF has seen both positive and negative returns. This reflects the performance of the underlying benchmark, which it follows closely. Remember, past performance isn’t a guide to future returns.

Annual percentage growth

Past performance is not a guide to the future. Source: *Lipper IM 31/01/2023. **Data not available between 31 January 2018 to 31 January 2019 as this is before the fund was launched.

FIND OUT MORE ABOUT iShares Global Corporate Bond ETF, INCLUDING CHARGES

VIEW iShares Global Corporate Bond ETF KEY INFORMATION DOCUMENT