BlackRock, the world’s largest investment firm, was founded as a fixed income shop before it expanded to a plethora of strategies. Now the firm is eyeing the asset class as a major growth area for one of its biggest product lines.
“One of the areas which I think is going to grow tremendously, which I think is going to catapult BlackRock into the next few years, is fixed income ETFs,” Rob Kapito, the firm’s president and co-founder, said at an investor conference on Tuesday. “We only right now cover 1% of all the fixed income that’s out there.”
Rising interest rates could pull investors back to the asset class, he said, which many had discarded in favor of higher-yielding equities.
One of Kapito’s favorite fixed income-ETF strategies focuses on mortgages. iShares, the firm’s $1 trillion ETF platform, could be a good wrapper for mortgage-based products, because ETFs mitigate tax, liquidity, and transparency issues, he said.
“If you own mortgages for your clients, and many do, they’re very complicated. You get monthly cash flows. You get prepayments when you don’t want them. They’re zip code- and pool-specific. It’s a nightmare,” Kapito said.
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“I can create mortgage products in an ETF, give you one product, trades on the stock exchange, you get one dividend. It’s just a much cleaner way to express it and it’s at a lower fee than what a bid-offer spread would be. Once that starts to get out into the market, that we could do that, I think this is going to be very, very large opportunity for us.”
The firm currently offers 87 fixed income ETFs, according to its website. The largest is a core US bond fund with $57.4 billion in assets.
Last year, overall fixed income ETF assets topped $600 billion for the first time, according to BlackRock – a small but growing corner of the $5 trillion overall ETF market.
BlackRock CEO Larry Fink has been bullish about the rise of ETFs overall. In October, he said the ETF market could jump to $12 trillion in the next five years. iShares was one of BlackRock’s bright spots in a turbulent fourth quarter, pulling in $81 billion of new capital.