BlackRock Set To Slice Corporate Bond ETFs By Sector

The iShares unit of global asset management giant BlackRock (BLK) is planning to launch Thursday what is expected to be the industry's first sector-specific ETFs tracking U.S. corporate high-grade issues.

Income-hungry investors have been flocking to investment-grade corporate bond exchange-traded funds at record rates this year, and the new set of funds are designed to let them target market segments in their search for higher yields and lower portfolio volatility. The initial three ETFs will follow Barclays indexes concentrating separately on financials (MONY), utilities (AMPS) and industrials (ENGN).

More sector-specific corporate bond ETFs are in the works, an iShares spokeswoman confirmed prior to the launch. Also on iShares's docket to start trading Thursday is an ETF concentrating on commercial mortgage-backed securities (CMBS) and one focused on triple-A-rated corporates (QLTA).

"This is potentially a very significant development for fixed-income ETF investors," said Dan Weiskopf, an adviser and portfolio manager at Forefront Capital in New York City, which manages about $100 million in assets. "For the first time, they're going to be able to tactically diversify in high-grade corporates."

Investment-grade corporate bond ETFs have attracted $1.4 billion in net inflows so far this year, according to Lipper. Should that pace continue, inflows for 2012 would exceed $10 billion, compared to $4.1 billion for all of last year. "This could easily wind up as the best year for high-grade corporates since they first became a player in ETFs in 2002," said Jeff Tjornehoj, a senior Lipper analyst.

Traditionally, fixed-income ETF investors have focused on "broad segments of the market," said Todd Rosenbluth, an S&P Capital IQ analyst. "There hasn't been a slicing of sectors in corporate ETFs. About as granular as we've seen is a division between high-yield and investment-grade corporates."

Along those lines, Guggenheim Funds has sponsored a series of corporate bond ETF portfolios that are set to mature in different years, he observed. "The idea is that investors can create their own bond ladders through ETFs," Rosenbluth said. "These iShare sector ETFs are going to give people even more flexibility."

In 2011, investment-grade corporate ETFs held $22 billion in assets, up 68% from a year earlier and 587% from 2007. "The category's been on fire," said Alan Zafran, a partner at Luminous Capital in Menlo Park, Calif. "High-grade corporate bonds fit the bill as providing relatively safe income at a reasonable price."

Investors are increasingly looking for better ways to tailor their corporate bond ETF holdings, Zafran says. "Many of our clients own corporate bonds but would prefer to exclude exposure to financial services," Zafran said. "But that has been almost impossible up to this point, using ETFs."

Luminous, which manages $4.7 billion in assets, invests in the $19 billion iShares iBoxx Investment Grade Corporate Bond Fund (LQD), by far the most liquid and popular ETF of its kind. Financials make up more than 36% of the fund's total assets. The ETF has a distribution yield of around 4%. It has attracted $1.5 billion in net new inflows this year alone. In 2011, it brought in $3.2 billion, according to iShares.

-By Murray Coleman, Dow Jones Newswires; 650-387-8024; [e-mail]