Why BlackRock’s Rick Rieder says investors ‘underestimate’ active fixed income ETFs

BlackRock Chief Investment Officer of Fixed Income Rick Rieder said investors underestimate actively managed fixed income exchange-traded funds. 

He told CNBC’s “ETF Edge” this week that one of his firm’s newest fixed income funds, the BlackRock Flexible Income ETF (BINC), has outperformed peers because its allocations are based on current market opportunity.

“The beauty of this active ETF is we can move around and take advantage of where the opportunity is,” said Rieder, who manages roughly $2.6 trillion in fixed income assets. “I think active ETFs in fixed income, people underestimate.”

BINC has gained 0.28% since its May 23 debut, as of Friday’s close. The benchmark iShares Core US Aggregate Bond ETF (AGG) fell 3.89%, and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) lost 0.16% during the same period.

The fund’s biggest allocation currently is in non-U.S. credit, which accounts for roughly 22% of the ETF, according to BlackRock’s website. U.S. high yield credit follows at nearly 17%, then U.S. investment grade credit at approximately 14% of total allocations. About 30% of the fund’s holdings originate outside the U.S.

According to Rieder, BINC has benefited due to opportunities overseas created by a stronger dollar.

“It’s the flip side of a European or Japanese investor. You can’t buy U.S. assets because the cost to hedge your currency is so expensive, but as a dollar investor, it is a windfall,” he said. 

The fund has capitalized on emerging market fixed income opportunities in Brazil and Mexico, but Rieder added that Europe comprises a “much bigger” portion of the fund’s allocation given enticing currency swap rates.

“What we do is we swap back things like European investment grade credit to dollars. You get 6.5% for two-year [notes], good quality investment grade companies,” he said.

Rieder also underscored the advantage of active management not only in finding opportunity, but in avoiding pockets of weakness.

“The secret about fixed income is if you can build more yield in your portfolio than the index and kick out the stuff you don’t want to own, you can create 50 to 75 basis points a year. … Get more yield in the index and manage your volatility aggressively.”

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