Host: Bryan Borzykowski

Navigating the bond market on your own can be difficult, which is why an increasing number of investors are adding fixed income ETFs to their portfolios. Rick Rieder, BlackRock's chief investment officer of global fixed income, joins me now to give his thoughts on opportunities in fixed income and why active ETFs may be an ideal way to get exposure to the vast bond market.

Rick. Thanks for being here. Where are you seeing the most compelling opportunities across fixed income markets today?

Rick Rieder, CIO, Global Fixed Income, BlackRock Inc.

So, I think the most incredible thing about the market, even though it's been a really long time, is that yields now are super attractive. We're at this period where the central banks, many of the developed markets central banks, are trying to eradicate inflation. But what's happening is it's keeping real rates at super attractive levels, in places like high yield, securitized assets, parts of the emerging market infrastructure.

You know, getting yield in a portfolio is the best opportunity. I think what’s pretty amazing about this is the credit quality. Because when rates were super low, companies turned their debt out. Individuals turned their debt out, financials turned their debt out. You're actually buying things in fixed income with really good credit quality, but you're buying them arguably too cheap or at high rate levels.

Bryan Borzykowski

Interest in actively managed ETFs is increasing. Why are they growing in popularity?

Rick Rieder

You know, the unique thing about fixed income is that, one of the secrets of fixed income is if you can provide more yield than an index, and you can provide it in places where you can manage the volatility, they call it, can you optimize fixed income.

So, there's 68,000 securities in fixed income, 68,000 securities. Your ability to tap into different ones – you want interest rate exposure shorter on the yield curve when the yield curve is flat to inverted. You don't need a lot of very tight trading assets that are in parts of indices, parts of the mortgage market that can be negatively convexed just on the better parts of it.

Your ability to be active in fixed income, pick apart you know, the better stuff and then isolate out the stuff that is, you know, almost definitionally not doing anything positive for the portfolio. You can generate more return, keep your volatility down. I think more and more people are seeing that fixed income managers can outperform indices readily and have historically, almost, every single year.

Bryan Borzykowski

Blackrock launched a new actively managed ETF in Canada XFLI/XFLX. What is it aiming to solve in the client portfolio?

Rick Rieder

So, we're super excited about it. I mean, it's that opportunity that we talk about that. I can get a lot of yield and you can create a portfolio with a rating that is high triple B, almost low single-A rated. So, you think about that, that is better quality than the average investment grade corporate. But you're still getting this tremendous yield.

Think about if inflation is running 2-2.5%, you can get this really attractive real rate that's almost akin to what you can get in an equity return. And so, what do you do with that. You know parts of the high yield market but isolate the better parts of high yield like double B in the in Europe, single B in the U.S.

Buy some securitized assets, use the CLO market. And so we'll use a lot of plus sectors in fixed income and then manage them to keep our ratings at a high level, keep our volatility at a low level, and then to keep our yield curve exposure, interest rate exposure moderate. But at the right part of the yield curve, so we get the benefit when rates come down.

Bryan Borzykowski

What are the benefits of a flexible approach in fixed income investing?

Rick Rieder

I mean, I've said it before. It's flexibility or unconstrained. What really the benefit is as I call it optimize your fixed income. Pick the best parts of it and then eliminate, and I truly think if you eliminate the parts of fixed income that don't have any value add you're already starting, I would argue somewhere between 25 and 50 basis points ahead, just taking out the inefficient stuff. Now, if you can get into the places that are, I would say under researched or require a lot of analytics, structuring, deep fundamental research. Then you can create even more return over that. So just being flexible to pick out the best parts. You need a big research team around the world to find the best places to do it.

Bryan Borzykowski

What is BlackRock's competitive advantage in fixed income?

Rick Rieder

There are a few advantages. The benefit of scale is being what I call agnostic to asset class. We don’t necessarily have to be in credit. We can be in mortgages or real estate or emerging markets. It's pick the best places around the world.

Use all your research, your analytics, you're structuring around the world, but then bring it together and risk manage it. You know, use data science. We use AI. We use our sophisticated risk management systems to think about stress testing, scenario analysis, correlations, diversification, efficient diversification. So, putting all those pieces together that quite frankly is hard for an individual to do.

Almost impossible. I would, I would argue.

But take all your resources to try and manage what is a portfolio, that takes an immense amount of work, but then boil it down to something that could be delivered in an efficient package and fit into somebody's model. Or fit into something where they're trying to generate return. Let us do all the work, let us do the work. And I’ll tell you, behind the scenes, there's a lot of work that goes into it.