PI Partnership – iShares
credit space are what we term “ESG broad or best-in-class exposures”. These use a combination of business involvement screens and scores, which are applied to traditional benchmarks to create ESG exposure.
The growth of sustainable investing is a major theme generally, but regulatory changes have made it an important driver in fixed income ETFs.
The emergence of the fixed income ETF repo market specifically has allowed fixed income investors who may already be engaging in repo transactions on sin- gle
bonds to obtain leverage or to
improve performance by trading ETF repos directly with banks instead of engaging as securities lending agents. This has made it operationally easier for fixed income investors to access addi- tional sources of return.
Are primary market processes robust enough to support the growing ETF credit market?
As fixed income ETFs continue to increase in size and scale, robust and durable pri- mary market processes and a resilient infrastructure are needed to underpin the health of the ETF ecosystem and the underlying market. It is important, there- fore, to have a fast and consistent approach to deal with creation and redemption custom baskets in all market conditions. This gives the authorised par- ticipants dealing directly with the ETF issuer confidence in the process that allows them to better price and provide liquidity to end investors. BlackRock has invested heavily in its pri- mary market infrastructure to bolster our ability to accommodate these large flows under all market conditions. These
enhancements have improved the pre- dictability and transparency of the custom basket process in several ways, such as the development of better interfaces with the APs that allows them to electronically submit custom basket proposals. Another important development has been preferred lists, which provide additional transparency on which bonds are likely to be considered as part of creation and redemption baskets on that trading day. Again, providing APs more transparency allowing them to accurately price funds reduces transaction times and draws fur- ther liquidity to portfolios. Finally, algorithms have been developed to help guide APs when selecting baskets and offer a rules and exposure-based framework to shape their inventory into these representative
risk slices, which
ultimately would be submitted and approved by iShares’ portfolio managers.
How is ESG being considered in fixed income ETFs?
The growth of sustainable investing is a major theme generally, with regulatory change being an important driver includ- ing for fixed income ETFs. More than 40% of flows into fixed income ETFs have gone into sustainable expo- sures in the year-to-date.³ Most of the flows and products we have seen in the
What we are seeing now is a growing and emerging interest in other areas of sus- tainability, such as climate. This is where we expect to see much of the innovation going forward.
Finally, how will Europe’s credit ETF mar- ket benefit from its evolving market structure?
ETF adoption has been supported by the continued increase in the liquidity of ETFs and broader enhancements in the fixed income trading ecosystem. The greater availability of trading volume data and increasing electronification has led to further automation, ease of access and lower costs of execution.
Examples of increased electronification include several brokers providing auto quotes on ETFs through request-for-quote platforms, which is accelerating the exe- cution of smaller recurring orders, and banks building out their ETF algorithmic trading capabilities.
To learn more, visit
iShares.com
1) Source: BlackRock as of 05 Dec 2021 2) Source: BlackRock, Bloomberg as of 05 Dec 2021 3) BlackRock as of 30 Nov 2021
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Issue 110 | February 2022 | portfolio institutional | 17
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