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BlackRock Alums Debuts First Junk ETF Like Turns Credit Cycle

(Bloomberg) — BlackRock Inc. alumni are launching their first slate of ETFs to shake up the junk-debt investing world, as money managers flee the industry’s biggest credit strategy at record speed.

Seven exchange-traded funds from BondBlox Investment Management, which carves US high-yield bonds across industries from telecom to energy, begin trading on NYSE Arca on Thursday. This is the first time investors can bet on an entire sector in one consolidated trade – and it is taking place in the midst of a rate-driven exodus from riskier assets.

Bloomberg’s US Junk Bond Index is down 4.2% so far in 2022, though losses are far from uniform. The spread has widened to between 10% for energy borrowers and 35% for technology firms. Bondblox executives say this is exactly the kind of market spread their new ETFs are designed to take advantage of.

“One of the reasons investors sell broad-based exposure is to allocate with better accuracy within the asset class,” Leland Clemons, one of the firm’s co-founders, said in an interview.

Much of the team behind Larkspur, California-based BondBlox, has at times worked for BlackRock, the world’s largest ETF issuer. The group also includes the formation of JPMorgan Asset Management and State Street Corp. Officer. Their plan is to bridge the gap between individual bond transactions and existing ETFs that only offer broad exposure.

Part of the bet is that the bond market will eventually catch up with equities in terms of electronic sophistication and transparency, potentially pushing more traders into ETFs. A recent industry survey by PricewaterhouseCoopers showed that a majority of respondents expect the global ETF boom to continue through 2026, with demand for fixed income products expected to be “particularly dominant” in the US.

For now, corporate bond ETFs are battling rising expectations the Federal Reserve will tighten policy to stave off inflation at decade-high levels. BlackRock’s iShares iBoxx High Yield Corporate Bond ETF (ticker HYG) — the largest of its kind — has been hit by outflows of nearly $4.3 billion this year. This is more than any other quarter since its inception 15 years ago.

Against that background, some issuers are rushing to provide security. Among other ETFs launched this week is the Simplified High Yield Plus Credit Hedge ETF (CDX), which combines junk bond exposure with a credit hedging strategy.

Still, BondBlox is betting that investors are seeking more targeted exposure. In addition to sector funds, the startup’s next move is to launch three ratings-focused strategies within US speculative-grade debt. It can also launch credit funds with international exposure.

“Targeted exposure will help them allocate risk more effectively in an environment that is more volatile,” Clemons said.

All seven sector funds have an annual expense ratio of 0.35%. They included:

  • BondBlox US High Yield Industrial Sector ETF (XHYI)
  • US High Yield Telecom Media and Technology Sector (XHYT)
  • US High Yield Healthcare Sector (XHYH)
  • US High Yield Financial and REIT Sector (XHYF)
  • US High Yield Energy Sector (XHYE)
  • US High Yield Consumer Cycle Sector (XHYC)
  • US High Yield Consumer Non-Cyclical Sector (XHYD)

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