New iShares Bond ETF Seeks Optimal Income Mix

Income investing has quickly become a hot button topic among ETF investors who are searching for the right mix of credit quality, duration, and yield.

The threat of rising interest rates and below-average dividend streams from traditional aggregate bond funds has many income seekers looking for alternative strategies to meet their needs.

With that goal in mind, Blackrock (NYSE:BLK) just recently launched the iShares Yield Optimized Bond ETF (NYSE:BYLD).

This ETF is a fund of funds that takes a multi-sector approach to its fixed-income allocation by utilizing other iShares ETFs for its underlying holdings.

The top three funds in BYLD include: iShares MBS ETF (NYSE:MBB), iShares High Yield Corporate Bond ETF (NYSE:HYG) and iShares Intermediate Credit Bond ETF (NYSE:CIU).

BYLD is unique in that it gives you access to a variety of individual sectors of the U.S. bond market without the overweight nature of treasuries, investment grade corporate bonds, and agency securities that make up the iShares Core Total U.S. Bond ETF (NYSE:AGG).

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BYLD is clearly focused more focused on the credit side of the spectrum and has a very low allocation to high quality fixed-income securities. Treasuries are typically more sensitive to changes in interest rates, while high yield bonds fluctuate in relation to corporate and economic outlook.

This may play right into the wheel house of retirees, pension funds and other income portfolios that are looking to eschew interest rate sensitivity in favor of taking on additional credit risk for greater yield. The top three holdings in BYLD all have effective durations of less than 4.5 years, while AGG has an effective duration of 5.2 years.

Because BYLD is so new, it has yet to distribute any income from which to calculate the current yield. However, it is sure to be higher than the current 2.07 percent yield of AGG.

It will be interesting to see if BYLD makes significant headway in attracting assets away from more established fixed-income ETFs in this space.

While that landscape has proven to be a tough hill to climb, BYLD has many attractive qualities that set it apart from its competitors and make for a compelling investment thesis.

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