Voices: BlackRock ETFs smooth the way for Treasury investors
If it wasn’t abundantly clear already, this week marked a watershed moment for the $16.7 trillion U.S. Treasury market. Specifically, the benchmark 10-year yield has dropped to record lows in each of the past three trading sessions as the worldwide coronavirus outbreak pushes investors toward safe havens. It extends a bond bull market that dates back almost four decades.
For those who have been a part of the world’s biggest and most-liquid bond market during this tremendous run, trading individual Treasurys is old hat. For younger investors who’ve known only a world with ETFs for every asset class, though, figuring out how to actually own government securities can be a bit daunting. Sure, there are options like the iShares 20+ Year Treasury Bond ETF (TLT), which reached a record high this week. But that fund doesn’t lock in a given yield, nor does it ever mature, two typical qualities of a fixed-income investment.
The U.S. Treasury Department, for its part, has the TreasuryDirect website. On the homepage, one banner states that “Buying Treasury Securities has never been easier!” Here’s what it looks like:
Now, I have no standing to critique website design. But contrast that with the web and mobile interface of a fintech startup like Robinhood Financial, which offers commission-free trading on stocks and ETFs, or even the discount brokerages, and it’s no contest where young investors — and even some financial advisors — will turn.
"We seek to finance the government at the least possible cost to taxpayers over time," said Treasury Secretary Steven Mnuchin.January 21
Defined-maturity funds offer traditional fixed-income interest payments.July 1
The funds may be gaining traction among older investors with significant assets, but rarely live up to their billing.December 2
BlackRock has a novel solution that could very well make good on the claim that buying Treasurys has never been easier.
The company announced Thursday that it’s expanding its iShares iBonds suite with term Treasury ETFs that range from December 2021 (IBTA) to December 2029 (IBTJ). Previously, iBonds had ETFs for high-yield, investment-grade corporate debt and municipal bonds. These are the industry’s first term-maturity ETFs for Treasurys, BlackRock said.
In some ways, the timing is ideal. Financial markets are teetering, with the S&P 500 declining for five consecutive sessions, raising the specter of a steep and sustained sell-off. Traders are betting that the Fed will need to cut interest rates sooner rather than later in an attempt to offset a global economic slowdown caused by the coronavirus outbreak. So while benchmark Treasury yields may be lower than ever, locking in a modest gain doesn’t seem so bad in contrast to the 8% drop in the stock market over the past week.
“There are some people who don’t want to take credit risk, they want safety and stability, but they’re not individual bond pickers,” Karen Schenone, head of iShares U.S. fixed-income strategy, said in an interview. “This lets them buy Treasurys in the maturity date they want, but they don’t have to go out and try to select individual Treasury CUSIPs,” she said, referring to the identifier assigned to a given bond.
Term-maturity ETFs are a small but growing part of the broader industry. I wrote about BlackRock’s iBonds and Invesco’s BulletShares in July, noting that they have the appealing quality of acting like bonds rather than just providing “exposure” to fixed income. In each fund, the money managers buy only debt with matching due dates. The companies expect investors or advisors will construct a “ladder” by spreading money across each of the funds, which will pay steady interest and return the net asset value upon maturity.
On its face, Treasurys are something of a strange choice for a term-maturity ETF, given that they’re widely recognized as a monolithic risk-free asset class. Unlike in credit markets, where diversification is crucial because bonds can come from different industries and companies of varying sizes, there’s virtually no benefit to owning distinct Treasury notes with similar maturities. Schenone said the ETFs have between six and 12 individual Treasury CUSIPs in them.
That suggests BlackRock’s motivation was primarily catering to the shifting whims of investors. Indeed, here’s what Schenone said about what she’s hearing from BlackRock’s clients:
“For a lot of advisors, where their brokerage accounts are set up to buy mutual funds and ETFs, this is just a very natural extension of our product suite. It gives our clients a broad range of asset classes now, so they can really customize their bond ladders and have the risk tolerance they want.
We’ve definitely seen a move away from individual bond picking toward more managed products. Separately managed accounts, ETFs and mutual funds have all grown, and individual bond picking has declined.
We’ve also been working with some financial advisors who manage money on behalf of more institutional clients like small foundations or endowments, and they said they’d be more interested in Treasury bonds in this format because it’s just easier and simpler for them to buy it for the small institutional investor that way.”
It seems reasonable to conclude that “easier and simpler” options will win the day as market structure evolves in the coming years. Already, investors and analysts are pointing to large ETFs as proxies for demand across markets. Just this week, for instance, Bloomberg News’s Katherine Greifeld highlighted that State Street’s loan ETF and its Industrial Select Sector SPDR Fund posted their biggest outflows ever, as did BlackRock’s junk-bond ETF. It’s useful to know exactly how much money is flowing in and out of these products every day.
Of course, iBonds ETFs aren’t designed for day-to-day trading. Schenone said a majority of investors hold until maturity, though anywhere from 5% to 20% will sell early. That flexibility makes them similar to no-penalty certificates of deposit, which I wrote about last month, though iBonds offer longer maturities and have a small 0.07% expense ratio.
The iBonds lineup added $2.1 billion in assets in 2019 and now has $9.2 billion across 37 ETFs. Schenone said she expects similar growth in 2020. That’s a modest sum in the grand scheme of ETFs, but it’s a solid showing for niche products that target buy-and-hold investors.
There’s little reason to doubt their popularity will only grow. In markets, as in most things, convenience is paramount. While the U.S. government asserted that it’s easy to buy bonds through TreasuryDirect, BlackRock was busy innovating.