BINC: BlackRock’s Attractive Fixed Income ETF

proposition

We have the BlackRock Flexible Income ETF (NYSEARCA: Pink) It was about a year ago, right after its founding. In the original article, we explained the intentions of the new fund and its asset manager. A favorable macro environment for bond funds. We’re revisiting this name as it nears its one-year anniversary and thanks to its rapid rate rise over the past few weeks.

In our article, we will highlight why today’s environment is ideal for taking a long-term position in BINC.

Markets are pricing in the Federal Reserve’s rate cut

Over the past few weeks, we have seen drastic rate repricing.

The blue line in the graph above represents the current yield curve and the red line represents the current yield curve. Beginning of the year. All points on the curve above the 4-month tenor are much higher, especially the so-called ‘belly’ part of the curve, which is the 2- to 10-year tenor.

Why has the yield curve risen? simple. The data was much stronger than expected, with inflation rising slightly rather than falling. Markets have moved to price one or two interest rate cuts in 2024, depending on investment bankers’ forecasts.

It’s fascinating how quickly market participants can move from one extreme to another in a short period of time. While six cuts seemed like a lot at the beginning of the year, no cuts in 2024 represents another extreme in our view. Oddly enough, we’ve seen a resurgence of participants talking about interest rate increases and the 6% yield figure. Our position is that there will be no further interest rate increases. The Fed has been very clear about this, and the political implications of raising rates further in an election year are incalculable. Our base case is one cut in the summer, and the Fed will continue to watch for the rest of the year if the data remains strong. In this base case, the Fed shows a willingness to cut while still maintaining high interest rates and generally restrictive policies.

Bond funds are attractive, and active funds are especially attractive.

In today’s environment, bond funds are particularly attractive to long-term buy-and-hold investors, given the significant fluctuations in interest rates. BINC stands out from the crowd given its multi-sector portfolio and proactive approach to its holdings. Active funds can easily trade with specific issuers and names as companies move forward, and large asset management platforms like BlackRock provide an optimal foundation.

The fund currently has large buckets dedicated to EM credit and CLOs in addition to traditional US high yields.

As a true multi-sector ETF, this vehicle takes positions across the credit spectrum with a quasi-equal distribution.

The AAA name represents 19% of the fund (primarily MBS bonds), with the remaining credit rating ranges alternating between 10% and 20%. Please note that approximately 35% of our holdings are below investment grade.

The fund has broad mandates and can shift focus and positioning as portfolio managers see fit.

High total return, low risk

The beauty of actively managed bond funds is that they don’t have to provide eye-catching returns to deliver. BINC has a SEC yield of 5.49% but has delivered total returns of over 7% over the past year.

What’s interesting is that BINC has outperformed another popular bond fund, the JPMorgan Income ETF (JPIE), since its inception. Here, we have covered JPIE with a Buy rating. Despite the recent surge in returns, BINC has delivered nearly 2% ‘alpha’ through the trading insights of its portfolio managers.

The fund has a low duration of 2.8 years and an OAS of 190bps.

Looking at nearly a year of performance history, it can be said that BlackRock’s management is doing a tremendous job and in addition to returns and duration, the fund will also deliver market alpha.

In terms of risk, BINC also performed well.

If we look at the performance chart, we can see that BINC had a very shallow decline of -2% from the start. Thus, the fund generated a total return of over 7% with only a 2% loss. These risk/reward numbers are enviable, and many bond funds have performed much worse. Active fund management is key to risk management, allowing portfolio managers to manage funds with the most viable assets at any time.

When looking at bonds, investors should pay attention to the drawdown. It makes no sense to buy an asset that returns 8% but has a drawdown rate of -25%. There is no risk/reward. Conversely, while an asset with an 8% return but -10% drawdown is attractive, BINC hits a home run with its risk/reward analysis.

What does the future hold for BINC?

We like the fund, its composition and active management. From a pure bond math standpoint, investors should expect a 2.5% return over the next 12 months, plus a 5.5% return. Taking into account the results of our large active management, we will add an additional 1.5% in alpha generation, resulting in total returns exceeding 9.5% over the next 12 months, while losses will be limited.

We set the above expectations based on the rate base case described in the first section of the article. If economic data suddenly worsens and the Fed is forced to cut interest rates faster and more, BINC will benefit. However, in this case, some of the impact on duration will be offset by wider credit spreads.

conclusion

BINC is a bond ETF. This fund is offered on the BlackRock platform and represents an active approach to multi-asset bond ETFs. The vehicle has delivered a total return of over 7% over the past year, despite a recent surge in returns. Therefore, BINC generated alpha through active management and outperformed JPIE. We expect BINC to continue to outperform and generate market alpha in excess of its return and term components. Given the recent surge in yields, the current macro environment is ideal for taking a long position in BINC, with a total return of 9.5% expected over the next 12 months.