The fixed income and bond ETF universe offers investors hundreds of choices. Up until recently, most of them have focused on broader swathes of the market. Enter BondBloxx.
BondBloxx is a relatively new issuer in the ETF space. But its strategy of offering bond ETF products with very specific maturities, credit qualities and sector exposures has drawn interest. The company offers two dozen bond ETFs accounting for more than $3 billion of assets.
BondBloxx gives ETF investors more precision to laser in on very narrow segments of the bond market. That's different from many mainstream bond ETFs. Most large bond ETFs let you invest in a fund targeting five- to 10-year maturities or one investing in high yield bonds. For many, that's sufficient for long-term portfolio strategies.
But JoAnne Bianco, an investment strategist at BondBloxx, says many investors want more. Prior to joining the company, she spent time as a senior portfolio manager, director of corporate bond research and senior credit analyst for high yield, investment grade and crossover portfolios.
The bond market is only becoming more complex. And the Federal Reserve is likely to begin lower interest rates soon. With that backdrop, Investors Business Daily asked Bianco to discuss her company's vision for the future. She shares what she thinks the bond market may hold for the rest of this year and beyond.
Going Narrower With Bond ETFs
IBD: Your company was early to offer ETFs targeting specific durations, credit qualities and sectors within fixed income. Do you feel this kind of narrower focus is going to become a trend in the ETF marketplace?
JoAnne Bianco: While fixed income ETFs have grown significantly, investors still have limited choices in the bond ETF landscape for products that offer the specificity and precision available in equity ETFs. Remarkably, fixed income exposures represent only 20% of the ETF market, both by assets and number of products. Moreover, most bond ETFs currently available are broad-based exposures, which limit flexibility for investors. There is growing recognition that this gap needs to be addressed, and BondBloxx will continue to be at the forefront of driving innovation and offering greater precision fixed income tools to help meet the evolving needs of investors.
IBD: You debuted your first ETF a little more than two years ago and have since grown to more than $3 billion in assets. Why do you think investors are putting money in BondBloxx products?
Bianco: With yields the highest in decades across many bond categories, fixed income has come back into focus and investors have been reminded that bonds offer a valuable source of income and stability. However, along with higher interest rates has come higher volatility, which means investing with precision matters. Investors have chosen BondBloxx ETFs because they want tools that do precisely what they are designed to do. Whether owning the higher quality bonds within the high yield bond category or allocating to a specific duration on the U.S. Treasury curve, investors who want to express their specific views find BondBloxx ETFs appealing.
Broad Vs. Focused
IBD: Should investors consider these focused fixed income ETFs as a replacement for more diversified bond funds in their portfolios or as a supplement?
Bianco: BondBloxx ETFs can certainly be used to replace diversified bond funds and build customized bond ETF portfolios with the exposure building blocks. We also see advisors using BondBloxx ETFs to express their own tilts for client portfolios as a complement to broad, diversified bond funds.
IBD: In your company's midyear fixed income outlook, you named CCC-rated bonds as your top pick. What's your investment case for this group?
Bianco: Our investment case for CCC-rated corporate bonds starts with our view that resilient economic conditions in the U.S. will remain supportive of high yield credit quality, including the CCC rating category. We like the elevated yield available for CCC rated bonds, currently in the 12% range, as well as the coupon income cushion this category provides against potential credit spread widening. Reflecting the supportive credit fundamentals and the attractive coupon income, CCC rated corporates have continued to outperform year to date 2024 among fixed income asset classes, extending their outperformance experienced in 2023.
Rotating Into Bond ETF Strength
IBD: The BondBloxx USD High Yield Bond Sector Rotation ETF is unique within the company's lineup. Can you explain how this fund works and how investors might use it in their portfolios?
Bianco: The BondBloxx USD High Yield Bond Sector Rotation is the first of its kind in the fixed income ETF landscape, offering access to an active high yield bond sector rotation strategy. HYSA allocates among BondBloxx's seven high yield industry sector ETFs and rebalances monthly. We're seeing clients use this to establish an active position in U.S. high yield bonds with one ETF, redeploy broad benchmark high yield bond ETF allocations and manage credit cycle risk. Investors can compare this fund to active high yield mutual funds or ETFs.
Are Defaults A Problem?
IBD: We're seeing evidence that consumer and commercial debt default rates are rising, yet credit spreads remain historically narrow. Do you feel that high yield bond investors are exposed to additional risk right now?
Bianco: We believe investors are well-compensated right now for the credit risk in U.S. high yield bonds. Although spreads are tight, credit quality remains historically strong, with high yield defaults at just 1.8%, below their long-term average of 4%. The elevated coupon income that high yield bonds offer, especially in specific rating categories like B and CCC, is compelling as we head into the economic and market environment of the fourth quarter.
IBD: We've heard a lot about how the 60/40 portfolio is "dead," both because yields were virtually nonexistent for years and then again because of 2022's bond bear market. Do you think 60/40 is a viable option again with Treasury bills yielding 5%?
Bianco: Although a 60/40 portfolio may continue to be a convenient starting point for investors, our view is that investors should now favor fixed income allocations in their portfolios over equities in the coming cycle. We believe there are opportunities across the fixed income landscape reflecting yields in most sectors still near decade highs, offering attractive total return potential with less volatility than equities and high current income versus future price appreciation.
What's Next For Bond ETFs?
IBD: Your focus thus far has been targeted fixed income ETFs. Where do you envision the next big growth frontier is for your company?
Bianco: We have filed with the SEC to launch several additional ETFs across various fixed income exposures, including in the tax-aware and inflation strategy space. BondBloxx is focused on offering access to fixed income exposures that are differentiated and innovative in the ETF industry. Bonds are what we do, and we aim to empower this next generation of bond investors.
IBD: What is the most underappreciated risk you see in the financial markets today?
Bianco: As improbable as it may have seemed at the outset of the Fed's rate hikes, it appears that Fed policymakers may have been able to pull off a "soft landing" for the U.S. economy. They have accomplished the goal of slowing the economy down to get inflation under control while avoiding a recession. An underappreciated risk in our view could be that there is "no landing," which is an environment that could ultimately be reinflationary and where interest rates could go higher again. Although this is not our view at this time, there are risks associated with the number and pace of eventual Fed rate cuts in an economy that proves to be more resilient than expected.
Sizing Up The Market For Bond ETFs
IBD: Any other final thoughts on the state of the global economy and financial markets?
Bianco: We remain bullish on the U.S. economy and U.S. corporations. Therefore, we are bullish on U.S. high yield bonds. Strong fundamentals benefiting U.S. corporations have been a clear differentiator this cycle, boosting the health of the U.S. high yield corporate bond market in particular. Average credit quality for the high yield market remains near all-time highs, with close to 50% of the asset class rated in the BB category. High yield corporate balance sheets remain well-positioned, with issuers continuing to actively address their debt maturities, reducing the chance for a significant rise in corporate defaults.
