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Shifts in Bond Markets and Rates Drive Institutional Usage of Fixed Income ETFs, According to BlackRock

February 27, 2014

First fixed income ETF survey by Greenwich Associates reports vast majority of institutions use ETFs for ease of use and liquidity

Institutions quickly embracing fixed income ETFs for long-term strategic exposures

NEW YORK--(BUSINESS WIRE)-- Institutional investors are using fixed income exchange traded funds (ETFs) as they adjust their portfolios to adapt to post-financial crisis regulatory changes and rising interest rates, according to a new report, Institutional Investors Turning to Fixed-Income ETFs in Evolving Bond Market, from Greenwich Associates.

Changes to fixed income portfolios of corporate and public pensions, foundations and endowments, investment managers, large registered investment advisors, and insurance companies are revealed in the first U.S. fixed income ETF study by independent research firm Greenwich Associates and sponsored by iShares, the ETF business of BlackRock.

The current and expected future use of fixed income ETFs with the backdrop of a changing bond market indicate strong growth of fixed income ETFs. A large percentage of current users (85%) have employed fixed income ETFs for at least two years and 66% of users have increased their usage since 2011.

Other key findings in the research are: 1) around 80% of institutions surveyed use fixed income ETFs for ease of use and liquidity to help them access bonds in the post-financial crisis bond market; 2) nearly 50% of institutions have quickly progressed their use of fixed income ETFs from tactical to strategic; and 3) out of the non-users who plan to use fixed income ETFs in the coming year, 67% plan to allocate 6-10% of their fixed income portfolio to ETFs.

Top Reasons for Using Fixed Income ETFs – Ease of Use and Liquidity

Institutions report ease of use and liquidity as the main reasons to use fixed income ETFs, 81% and 80% respectively. The impact of post-crisis regulatory changes is challenging institutions to reposition their portfolios. New regulations have lowered dealer inventories, driving down trading volumes and liquidity for individual bonds. Meanwhile, the liquidity of fixed income ETFs has increased significantly1 and since fixed income ETFs launched in the U.S. in 2002, their assets have grown considerably to about $246 billion as of December 20132.

Matthew Tucker, Head of iShares Fixed Income Investment Strategy at BlackRock, said, “Institutions are re-examining their fixed income portfolios in light of an evolving market that is characterized by increased volatility, decreased liquidity and more challenging access. These trends are leading investors increasingly to fixed income ETFs as a way to source exposures, harness liquidity and efficiently implement desired investment strategies.”

Shift in Rate Environment Triggers Recent Changes to Fixed Income Portfolios

Most of the institutions surveyed (65%) have made changes to their fixed income portfolios, shifting sectors and accordingly demanding new ETFs to meet their needs. Institutions most common changes to their portfolios have been to shorten duration and to move into sectors that offer potentially higher yields such as corporates, high yield, and international and emerging markets bonds as they prepare for a gradual, long-term increase in interest rates.

Greenwich reports that these portfolio changes are expected to continue and perhaps even accelerate in the year ahead.Demand for new ETF products is strongest in areas that can potentially boost yield and manage interest rate risk. The highest demand is for fixed-maturity ETFs (80% of respondents).

Institutions Have Quickly Begun to Use Fixed Income ETFs Strategically

By investor type, around 80% of investment managers and large RIAs surveyed use fixed income ETFs to obtain long-term exposures in the core component of their portfolios, while 63% of institutional funds and 56% of insurers use fixed income ETFs as long-term, core exposures.

As further evidence of the strategic use of ETFs, nearly 60% of current users allocate 10% or more to fixed income ETFs. Greenwich suggests that the evolution of institutional use from tactical to strategic use of fixed income ETFs appears to be taking place more rapidly than their use of equity ETFs.

Signs Show More Usage and New Users

Greenwich cites that growing momentum of institutional use and increased levels of investor comfort with the product point to rising usage.Nearly half of institutional managers and 38% of institutional funds plan to increase their fixed income ETF investments in the next 12 months. Out of the non-users who plan to use the ETFs in the coming year, 67% plan to allocate 6-10% of their fixed income portfolio to ETFs.

Non-users point to reasons why they are not current using ETFs – investment guidelines not allowing ETFs, lack of understanding about liquidity and all-in costs, and low levels of sell-side coverage. Greenwich sees the barriers to adoption will “inevitably weaken” as ETF use continues to gain momentum.

Daniel Gamba, Head of iShares Americas Institutional Business at BlackRock, said:

“The Greenwich report’s findings represent many of the conversations we have with institutions. They are making numerous portfolio changes and struggling with a more challenging bond market, which makes them open to using new investment tools.

“We help educate them on ETF liquidity, costs and how to use them. Perhaps because of changes to the underlying market, we see that once institutions use fixed income ETFs, they quickly embrace them as important strategic tools.”

About BlackRock

BlackRock is a leader in investment management, risk management and advisory services for institutional and retail clients worldwide. At December 31, 2013, BlackRock’s AUM was $4.324 trillion. BlackRock helps clients meet their goals and overcome challenges with a range of products that include separate accounts, mutual funds, iShares® (exchange-traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors through BlackRock Solutions®. Headquartered in New York City, as of December 31, 2013, the firm had approximately 11,400 employees in more than 30 countries and a major presence in key global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa. For additional information, please visit the Company’s website at www.blackrock.com.

About iShares

iShares is a global product leader in exchange traded funds with over 600 funds globally across equities, fixed income and commodities, which trade on 20 exchanges worldwide. The iShares Funds are bought and sold like common stocks on securities exchanges. The iShares Funds are attractive to many individual and institutional investors and financial intermediaries because of their relative low cost and trading flexibility. Investors can purchase and sell shares through any brokerage firm, financial advisor, or online broker, and hold the funds in any type of brokerage account. The iShares customer base consists of the institutional segment of pension plans and fund managers, as well as the retail segment of financial advisors and high net worth individuals.

Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737) or by visiting www.iShares.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Transactions in shares of the iShares Funds will result in brokerage commissions and will generate tax consequences. iShares Funds are obliged to distribute portfolio gains to shareholders. Shares of the iShares Funds may be sold throughout the day on the exchange through any brokerage account. However, shares may only be redeemed directly from a Fund by Authorized Participants, in very large creation/redemption units. Diversification may not protect against market risk or loss of principal.

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

2014 BlackRock. All rights reserved. iSHARES, BLACKROCK, and BLACKROCK SOLUTIONS are registered and unregistered trademarks of BlackRock. All other marks are those of their respective owners. iS-11786-0214

1 Source: Bloomberg data as of December 31, 2013.

2 Source: Investment Company Institute, December 2013.




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