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Introduction
Fixed Income ETFs (“FI ETFs”) are a relatively recent, but
important innovation in the bond markets. FI ETFs are fully
funded, exchange traded bond portfolios, most of which
seek to track established fixed income market capitalization-
weighted benchmarks. For many investors, FI ETFs provide
a liquid, transparent and cost-effective way of to access the
cash bond markets. FI ETFs allow investors to trade
portfolios of hundreds or thousands of bond positions in a
two way market on exchange through the ETF wrap. Their
unique physical creation/redemption mechanism allows
dislocations between exchange values and OTC values to
be arbitraged, providing investors with fixed income price
discovery across two distinct trading venues, the exchange
and OTC market1.
Listed and OTC options now trade on many fixed income
ETFs. As some of these options have become more liquid,
investor interest has increased both outright and relative to
other fixed income options. This paper will explore the
mechanics and trading of options on FI ETFs, how to
compare them to other fixed income options and how they
may be used in portfolio strategies or in a relative value
context.
Important differences between FI ETF options
and other fixed income options
There are a number of conceptual differences between FI
ETFs and traditional fixed income securities as well as FI
ETF options and other fixed income options. A simple fixed
income option, such as a swaption, gives the holder the right
to exercise into a long or short position in an underlying
swap or bond at a known fixed rate / price and a known
maturity on the expiration date (in the case of a European
exercise feature or prior to that date in the case of an
American or “Bermudan” exercise feature).
FI ETF options differ in important ways from traditional FI
options.
Ongoing Portfolio vs. Individual Bond
An FI ETF option essentially represents an option on an entire portfolio of bonds as opposed to a single bond or swap.
Understanding Fixed Income ETF
Options
January 2018
The portfolio is rebalanced monthly in alignment with the
underlying reference benchmark that it seeks to track and
therefore lacks a “maturity”2. Accordingly, the underlying
characteristics such as the average coupon and average
maturity of the portfolio may change over time as the index
evolves.
Rules governing index inclusion/exclusion of securities are
available, but it is not possible as an example to predict what
new issues may come to market and ultimately be included
in an index or what issues may get downgraded below a
specified index ratings threshold or be subject to a corporate
action which would result in removal from an index. Passive
FI ETFs typically sample the index, seeking to minimize
tracking error without increasing rebalancing costs.
In reality, the reference benchmarks and the more
seasoned, liquid fixed income ETFs hold hundreds if not
thousands of securities. Accordingly, month over month
changes in index and portfolio composition are unlikely to be
dramatic, so there is a reasonable degree of stability in risk
characteristics and cash flows. Note that these parameters
have been reasonably stable over time. As an example,
Figure 1 shows a time series of durations for HYG (iShares iBoxx $ High Yid Corp Bond ETF).
Figure 1: HYG Durations
Cash Distributions
Unlike a conventional vanilla fixed income option on a single
bond/swap in which the underlying’s cash flows are known
and deterministic, the distributions made by fixed income
ETFs can vary.
3.00
3.20
3.40
3.60
3.80
4.00
4.20
4.40
4.60
4.80
5.00
5/1
/201
4
7/1
/201
4
9/1
/201
4
11/1
/20
14
1/1
/201
5
3/1
/201
5
5/1
/201
5
7/1
/201
5
9/1
/201
5
11/1
/20
15
1/1
/201
6
3/1
/201
6
5/1
/201
6
7/1
/201
6
9/1
/201
6
11/1
/20
16
1/1
/201
7
3/1
/201
7
5/1
/201
7
Option A
dju
ste
d D
ura
tion
Source: Blackrock, 5/31/2017
1 Tucker, M. and S. Laipply. “Bond Market Price Discovery: Clarity Through the Lens of an Exchange”. The Journal of Portfolio Management, Winter 2013, pp 49-62
2 The exception would be “term maturity” ETFs and the indices they track such as iBonds®. For these vehicles both the ETF and the underlying index eventually transition to cash and mature
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Interest on the fund’s underlying bond portfolio accrues daily
and the amount of income earned by the fund is distributed
monthly to all shareholders of record. Similar to a full bond
price falling by the amount of the coupon on a coupon date,
the ETF’s NAV should fall by the amount of the distribution
on the ex-dividend date. As a result, unexpected changes in
the size of the distribution should not have an impact on an
investor’s total return. However, unexpected changes in the
size of the distribution can change the “moneyness” of a
particular option. In practice, fund distributions have tended
to be fairly stable over time and have typically trended with
the overall yield environment as the index and fund
rebalances. Figure 2 uses LQD (iShares iBoxx $ High Yield Corporate Bond ETF) as an example.
Figure 2: LQD yield vs. Benchmark yield, 5/2014
-5/2017
Carry and Forward Price Arguments for FI ETFs
The variation in distributions, relative to the fixed coupon of
an individual bond, adds uncertainty to the calculation of
forward ETF prices. Additionally, there can also be variation
in the overnight borrow rate of the underlying FI ETF as term
borrow rates are atypical. Accordingly, FI ETF forward price
modeling relies on assumptions with respect to future
distributions as well as financing rates.
ETF forward prices will therefore be a function of:
► Current price
► Projected distributions
► Projected borrow rate
► Cash money market rate
Example 1: US Treasury forward pricing
As an example, it is a fairly straightforward exercise to
calculate the forward price for a 5-year US Treasury.
Consider the 2 3/8s of 05/15/27. On 5/15/17, the price for
this security was $100.28 which translated to a yield to
maturity of 2.34%. Assuming a term repo rate of 80 bps, the
forward price for this security for a settlement date of
6/15/17, was approximately:
Where,
PX(ft) = forward price as of time t
PX(s0) = spot price
repo = term repo rate
c = coupon
Example 2: TLT Forward Pricing
Now consider TLT, the iShares 20+ Year Treasury Bond
ETF which closed at a price of $121.06 on 5/15/17. Unlike
US Treasury bonds, there is not an active repurchase
market for FI ETF shares. However, clients may borrow and
lend ETF shares through the securities lending market.
Unlike the repo market, investors may be constrained with
respect to the use of cash arising from securities lending
transactions (i.e., proceeds are held by the securities lender
and generally invested in money market assets). In a US
Treasury repo transaction, an investor borrows / lends funds
in the repo market and then purchases / shorts the US
Treasury which then serves as collateral against the
repurchase agreement (haircuts would apply).
Source: Blackrock, Markit iBoxx 5/31/2017. Past performance
does not guarantee future results. For standardized
performance, see the end of this document.
As an example, assume that, immediately prior to the ex-
dividend date, an ETF has one shareholder and $1 of
earned income. Now assume that a new investor enters the
fund (also immediately prior to the ex-dividend date) by
contributing securities equal to the fund NAV in exchange for
a newly issued share. Both investors, being equal
shareholders, are entitled to an equal share of the fund’s
distribution. Accordingly, while the fund will still distribute $1
of total income, each investor will only get $0.50. Prior to the
second investor entering the fund, the original investor would
have received $1 in distributions and would have seen the
NAV of the fund drop by $1 on the ex-dividend date (all else
equal). With the inclusion of the new investor, both investors
will receive $0.50 in distributions (i.e., $1 in distributable
income divided by two shareholders) and will see the NAV
per share drop by $0.50 instead of $1.
Note that the total return under both scenarios will be
identical. However, since option strikes are not adjusted for
distributions, the size of the distribution may push an option
further into or out of the money. In this case, the NAV
decline was only half of what it would have been prior to the
entry of the second shareholder which means that any
option (put or call) outstanding would see less of a change in
value on the ex dividend date. Going forward, the “dilution”
effect would be reconciled since twice as many assets would
be earning twice as much income. All else equal, on the next
dividend date, there would be $2 of distributable income, or
$1 / share which was the state that existed prior to the entry
of the second shareholder.
𝐏𝐗 𝒇𝒕
= 𝐏𝐗 𝒔𝟎 × (𝟏 + 𝐫𝐞𝐩𝐨 𝒙𝐝𝐚𝐲𝐬 𝒂𝒄𝒕𝒖𝒂𝒍
𝟑𝟔𝟎− 𝟏𝟎𝟎 𝒙 𝒄 𝒙
𝐝𝐚𝐲𝐬 𝒂𝒄𝒕𝒖𝒂𝒍
𝟑𝟔𝟓)
𝐏𝐗 𝐟𝐭 = $𝟏𝟎𝟎. 𝟐𝟖 × 𝟏 + 𝟎. 𝟖𝟎% ×𝟑𝟎
𝟑𝟔𝟎− 𝟏𝟎𝟎 𝐱 𝟐. 𝟑𝟕𝟓% 𝐱
𝟑𝟎
𝟑𝟔𝟓=
$𝟏𝟎𝟎. 𝟏𝟓
2.5%
3.0%
3.5%
4.0%
4.5%
9/28/12 9/28/13 9/28/14 9/28/15 9/28/16
Benchmark Yield 30-day SEC Yield
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In a TLT securities lending transaction, an investor could
purchase/short TLT while lending / borrowing the underlying
shares (haircuts would apply in this case as well). The TLT
purchase must be fully funded by the investor and a
significant amount of proceeds from a TLT short may be
required as collateral by the securities lender against the
borrow of shares. Accordingly, the forward pricing arguments
for an FI ETF differ slightly relative to a bond in the repo
market as the opportunity cost of cash comes into play
(Figure 3):
Figure 3: Example of ETF lend/borrow transaction
Where,
ETF(ft) = forward price as of time t
ETF(s0) = spot price
rm = money market rate
rebate = the cost of borrowing shares / rate paid on
lending shares
y = ETF distribution yield
In order to calculate a forward price, assumptions about the
distribution and lend or borrow rate over the forward period
must be employed. TLT’s June 2017 distribution was
$0.293841 and it is assumed that the same distribution will
apply for July which translates into an annualized distribution
yield of $0.25481/$121.06 x 12 = 2.53%.
Assume that the overnight lending rate is 30 bps and the
overnight borrow rate is 50 bps (as provided by the lending
agent). For illustrative purposes, the average of the overnight
lend/borrow rebate, 40 bps, will be assumed for the entire
period. Finally, the money market rate is assumed to be
1.18%. The midmarket forward price from 05/15/17 to
06/15/17 would therefore be:
Unlike the UST forward calculation described in Example 1,
both the “fixed rate” of the ETF (i.e., the distributions) as well
as the financing rate are subject to change over the option
period given that term lending markets are difficult to attain.
The implication is that it is not theoretically possible to “lock
in” the forward price through a traditional cash and carry
strategy, and as a result, the option delta can be more
volatile.
As an example, assume that an options market maker
wished to trade and hedge the 121 strike TLT puts of
6/16/17 which closed at $1.47 / $1.50, or $1.485 midmarket
on 5/15/17. Using the same assumptions outlined previously
and the Bloomberg calculator OVME, the forward price
would have been $120.88 and the delta would have been -
50.7%. Assume, however, that the true distribution yield
ultimately turned out to be 3.53% instead of the previously
assumed 2.53%. Knowledge of the actual distribution rate
would have resulted in a “true” forward price calculation of:
The delta of the option based on this forward price would
have been -51.7% as opposed to the previously thought -
50.7% and the option value (all else equal) would have been
$1.54 instead of $1.49. As a result, a writer of this option
would have been under-hedged and would also have sold
the option for a lower price than what was justified by the
true forward price.
Indeed the estimated hedging losses (derived from the
difference in put values) that arose from the difference
between the realized vs. estimated distributions would have
been roughly $0.05 per option, or about 4 bps. While this
may not seem like a significant amount, a writer of $25MM
notional of this option would stand to lose approximately
$10,325. This in part may explain why options on FI ETFs
may tend to trade at wider bid/offer spreads than similar US
Treasury futures options or swaptions.
Overview of fixed income ETF options
Listed options exist on a number of fixed income ETFs.
American-style exercise puts and calls are available and
follow a calendar expiration schedule. Options on fixed
income ETFs are very similar to options on single stocks in
that they may be settled through delivery of the underlying in
exchange for the strike price. Figure 4 shows a Bloomberg
screenshot (function OMON) for listed options on HYG:
Figure 4: Listed Options on HYG
Lending
agent
ETF long
holder
ETF
borrower
/ short
seller
Fund shares Fund shares
Cash & MTM
Collateral
Fund
distributions &
borrow rebate
Fund
distributions &
lending rebate
Cash
collateral
Cash investment vehicle
𝐄𝐓𝐅 𝐟𝐭 = 𝐄𝐓𝐅 𝐬𝟎 × (𝟏 + (𝐫𝐦 − 𝐫𝐞𝐛𝐚𝐭𝐞) ×𝐝𝐚𝐲𝐬 𝐚𝐜𝐭𝐮𝐚𝐥
𝟑𝟔𝟎− 𝐲 ×
𝐝𝐚𝐲𝐬 𝐚𝐜𝐭𝐮𝐚𝐥
𝟑𝟔𝟓)
$𝟏𝟐𝟏. 𝟎𝟔 × (𝟏 + (𝟏. 𝟏𝟖% − 𝟎. 𝟒𝟎%) ×𝟑𝟏
𝟑𝟔𝟎− 𝟐. 𝟓𝟑% ×
𝟑𝟏
𝟑𝟔𝟓= $𝟏𝟐𝟎. 𝟖𝟖
$𝟏𝟐𝟏. 𝟎𝟔 × (𝟏 + (𝟏. 𝟏𝟖% − 𝟎. 𝟒𝟎%) ×𝟑𝟏
𝟑𝟔𝟎− 𝟑. 𝟓𝟑% ×
𝟑𝟏
𝟑𝟔𝟓= $𝟏𝟐𝟎. 𝟕𝟖
Source: Bloomberg
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As the screenshot illustrates, call and put options are quoted
at different strikes across different dates. To understand
quoting conventions and mechanics, we will examine a
specific option, the June 16, 2017 expiry 88 strike call
(Figure 5) as of 5/16/2017:
Figure 5: 88 Strike HYG Call (06/16/17 expiry)
The option is an American style call struck at $88 (i.e., the
long has the right to pay $88 in proceeds to the short in
exchange for a share of HYG on or before expiration). The
final expiration is 6/16/17, but the option may be exercised
earlier. Each option controls 100 shares of the underlying
fund, HYG. HYG options are currently quoted in $0.05
increments.
On 5/16/17, HYG closed at $88.31 and the open interest on
this option was 88,487 contracts. The current notional
outstanding was therefore 88,487 x 100 x $88.31 =
$781,428,697. The displayed delta was -0.653, so the delta
equivalent notional amount outstanding was approximately
0.653 x $781,428,697 = $510,272,939. The option was
quoted at a price of $0.50 bid / $0.57 ask (or 57 bps / 65 bps
relative to the $88.31 closing price). The displayed
midmarket price volatility for this option was approximately
4.50%. Because the options are American style exercise as
opposed to European, strict put/call parity does not apply but
the less restrictive conditions governing American style
options do (i.e., calls should generally not be exercised early
except potentially immediately prior to the ex-dividend date
while puts may be exercised if sufficiently deep in the
money).
Recall that the general boundary condition for American
style puts and calls is:
Where,
S = current share price
D = forecasted dividend(s) prior to expiry
X = strike price
r = discount rate
t = time to expiry (years)
C = call price (ask)
P = put price (bid)
We will refer to the 88 strike HYG calls and puts expiring on
6/16/17. We note that the 88 strike put expiring on 6/16/17
was being quoted at $0.60 / $0.64. Using full bid / ask
prices, a 1% discount rate, estimated discounted
distributions totaling $0.37 through expiration and 30 days
until expiration, we get the following result:
Therefore, the 6/16/17 expiry 88 strike call and put were
trading within their theoretical boundary condition and no
actionable arbitrage existed.
Calculating Implied Volatility with Carry
Arguments
As we saw in prior sections, assumptions about distributions
and financing can impact the forward price of the ETF.
Accordingly, for a given option quote, varying assumptions
about carry and the ETF forward price can impact the
calculation of implied volatility.
As an example, the July 21, 2017 87 strike HYG puts were
being quoted at a midmarket level of $0.725 at the close of
5/16/17. Assuming a distribution yield of 5.10%, a money
market yield of 1.18% and a borrow cost of zero, the forward
price would be $87.69 vs. the closing spot of $88.31. The
implied volatility corresponding to the forward vs. the option
value was 6.98%3.
Assume, however, that the actual borrow rate was 0.80% vs.
a lending rate of 0.30%, or 0.55% midmarket. Incorporating
this midmarket rate would result in a forward price of $87.60
(or $0.09 lower) and a corresponding implied volatility of
6.75% (or 0.23% lower). Figure 6 below illustrates the
computation using the Bloomberg OVME screen:
Figure 6: Calculating Implied Volatility
Source: Bloomberg
𝐒 − 𝐃𝐞−𝐫𝐭 − 𝐗 ≤ 𝐂 − 𝐏 ≤ 𝐒 − 𝐗𝐞−𝐫𝐭
$𝟖𝟖. 𝟑𝟏 − $𝟎. 𝟑𝟕 − $𝟖𝟖 ≤ $𝟎. 𝟓𝟕 − $𝟎. 𝟔𝟎 ≤ $𝟖𝟖. 𝟑𝟏 − $𝟖𝟖𝒆(−𝟎.𝟎𝟏×𝟑𝟎𝟑𝟔𝟓)
−$𝟎. 𝟎𝟔 ≤ −$𝟎. 𝟎𝟑 ≤ $𝟎. 𝟑𝟖
Source: Bloomberg
3. Per Bloomberg OVME calculation
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The Impact of Financing
It can be challenging to lock in term financing rates for an
ETF position. However, financing may be obtained indirectly
through the options market. Consider the June 16, 2017 95
strike HYG puts which were offered at $7.30 (or 827 bps
relative to a closing price of $88.31) on 5/16/17. Given
HYG’s closing price of $88.31, these puts are fairly deep in
the money and have little volatility sensitivity associated with
them. In that respect, they are akin to a short forward
position on HYG.
Using the same assumptions as before (a forecasted
distribution yield of 5.10%, cash money market rate of
1.18%), a borrow rate of 0% implied a volatility of
approximately 22% for the quoted option value of $7.30.
However, given how deeply in the money the option was, an
investor could assume that the true volatility level is zero.
Holding all else equal, a 0% volatility implied an annualized
borrow cost of 4.5%. (see Figure 7).
Figure 7: Implied borrow rate given quoted put
price
Figure 8 shows the implied annualized borrow costs over a
range of implied volatilities holding all other assumptions
constant for the above option. The option investor may then
assess the relative value of getting long or short the option
based on their assessments of financing rates and volatilities
vs. those implied by the market.
Figure 8: Implied volatility vs. implied borrow costs
Valuing Fixed Income ETF options
Because FI ETF options are American-style exercise, they
must be valued using lattice approaches employing term
structure models. A number of assumptions must be made
including projected distributions, financing rates and the
value of the fund on the final option expiry date. Because the
reference benchmark and fund are perpetual exposures,
assumptions must be made as to the value of the fund at
varying yield levels. The terminal values may be estimated
by running scenario analysis on estimated holdings for each
terminal yield scenario. Given the difficulty in precisely
estimating future index holdings, such an analysis may be
performed on current holdings. The appendix provides an
example of the valuation of a 7/21/17 expiry 123 strike put
on TLT.
Comparing volatility measures
Because fixed income ETFs trade on a price basis, options
on those ETFs are quoted on a price volatility basis. This is
in contrast to other fixed income options which may trade on
a yield volatility or spread volatility basis. In order to directly
compare FI ETF options with other fixed income options, we
will use “normalized” volatility as a common metric.
Normalized volatility is a scaled metric that is expressed in
basis points of volatility per annum. Note the following
definitions:
• Yield or spread volatility: The lognormal or “percentage”
volatility of the underlying yield or spread which
corresponds to the Black-Scholes-Merton (“BSM”) implied
volatility. This metric can be used for pricing interest rate
options in the BSM framework.
• Price volatility: The lognormal or “percentage” volatility
of the underlying price which corresponds to BSM implied
volatility. This metric can be used for pricing equity
options or other options such as fixed income ETFs that
trade on a price basis in the BSM framework.
• Normalized volatility: Scaled volatility which is defined
as follows for fixed income instruments:
• Normalized yield volatility (derived from yield) =
yield volatility x yield level
• Normalized yield volatility (derived from price) =
price volatility / forward duration
• Normalized spread volatility = Spread volatility x
spread level
Normalized volatility allows us to compare different types of
fixed income options on a comparable basis.
Source: Bloomberg
Implied Volatility Implied borrow
0.00% 4.50%
5.00% 4.15%
10.00% 4.10%
15.00% 3.40%
20.00% 1.10%
21.50% 0.00%
For illustrative purposes only.
𝐍𝐨𝐫𝐦𝐚𝐥 𝐕𝐨𝐥 =𝐏𝐫𝐢𝐜𝐞 𝐕𝐨𝐥
𝐃𝐮𝐫𝐚𝐭𝐢𝐨𝐧𝐟𝐰𝐝
FOR WHOLESALE CLIENTS ONLY – NOT FOR RETAIL OR PUBLIC DISTRIBUTION 5EII0318A-450667-1424721
Figure 9 shows implied normalized volatility curves for TLT,
UST bond futures options and options on 25yr USD swaps.
Note that the TLT and futures options trade on a price basis,
while swaptions trade on a yield basis. All were converted to
normalized annual volatility. In this case, options on TLT,
swaptions (on 25 year swaps), and bond futures options
appear to trade in context with each other with some
variation in the shorter/longer expiries.
Figure 9: Implied volatility term structures
As with any options market, deeply in-the-money or out-of-
the-money FI ETF options will trade at a skew to at-the-
money options. Figure 10 below shows the skew for HYG
options of varying expiries and levels of moneyness
(Bloomberg function SKEW).
Figure 10: Volatility skew on select HYG options
Evaluating Interest Rate & Credit Volatility
Components in Options on Credit ETFs
Options on credit ETFs present us with the interesting
opportunity to observe how the market is pricing the relative
contributions of interest rate and credit risk to the overall
volatility of a cash bond portfolio.
In order to attempt to disaggregate and evaluate rate and
spread volatility into separate components, we may examine
comparable expiry options on similar duration interest rate
and credit spread exposures. Specifically, an HYG put option
will be compared with similar expiry options on a 5-year
interest rate swap (i.e., 3m5y payer swaption) and on the 5-
year high yield CDX contract Series 28 (i.e., a CDX payer
swaption). Figure 11 provides the details for each option.
As an example, on 5/18/17, a 3 month expiry HYG -48 delta
option (August 18 expiry, 87 strike put) was observed trading
at a midmarket price volatility of 7.62%4. In order to convert
HYG to a normalized volatility, the price volatility is divided
by the forward duration.
Given that HYG has a price vol of 7.62% and a 3 month
forward duration of 3.67, the annual normalized volatility
would be 7.62% / 3.67 = 208 bps per annum. An at-the-
money 3m5y interest rate swaption has a forward strike of
1.90% and is trading at an annual normalized implied
volatility of 65 bps per annum, or an implied yield volatility of
0.65% / 1.90% = 34.2%.
Figure 11: HYG option, CDX option, rate swaption
Finally, we observe that a 3 month -46 delta CDX payer
swaption (August 16th expiry, 105.5 price strike) is trading at
a spread volatility 35.4%, or 163 bps on an annual,
normalized basis, give a spread duration of 4.6.
Recall that options on HYG are essentially options on bond
portfolios and therefore options on portfolios of combined
interest rate and spread exposure. Given that rates and
spreads are generally negatively correlated, volatility on
HYG options should in theory lie between the volatility on
similar duration interest rate options and spread options due
to portfolio diversification effects. This of course assumes
that the portfolio characteristics of underlying exposures are
highly similar which is not the case. Despite similar durations
and spread durations, the interest rate and credit spread
exposure inherent in HYG differs markedly from the rate
swaption and CDX swaption in terms of sectors, maturities
and number of underlyings. As an example, the rate and
CDX swaptions are based on single curve point exposures –
5 years – while HYG’s portfolio contains a wider range of
maturities (i.e., one year to thirty years) as well as callable
securities. Finally, the rate and CDX swaptions are
European-style exercise while options on HYG are
American-style exercise.
50
55
60
65
70
75
0.0
8
0.1
2
0.2
1
0.2
5
0.2
9
0.5
0
0.7
5
1.0
0
Imp
lied
An
nu
al
Basis
Po
int
Vo
lati
lity
Expiry (yrs)
TLT Options Swaptions UST Bond Futures Options
Source: BlackRock, Bloomberg, as of 5/16/17
Source: Bloomberg, as of 5/16/17.
3m HYG
put
option
3m
CDX.HY
payer
3m5y
payer
Underlying duration 3.7 4.6 4.7
Underlying spot PX /
Yield88.01 107.13 1.77%
Underlying Fwd PX /
Yield87.34 105.90 1.90%
Strike 87 105.5 1.90%
Delta -48 -46 -47
Price vol. 7.62% 7.49% 3.06%
Yield / Spread vol. 67% 35.4% 34.2%
Ann Normal vol (bps) 208 163 65
Premium (bps) 130 90 63
Source: Blackrock
4. Based on a midmarket option price of $1.30, distribution yield of 5.10%, money market rate of 1.18%, and midmarket lend/borrow rate of 0.45%
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The fact that HYG volatility for this particular option is higher
than both the rate and CDX swaption volatilities may suggest
that the option is either trading rich or that there is a fair
amount of dispersion among the exposures.
Nonetheless, it may still be a useful exercise to compare the
HYG option with a comparable package of rate and CDX
swaptions. The combined price volatility of the CDX / rate
swaption package would be:
Where,
w = the vector of rate and CDX swaption notional weights
V = the covariance matrix of 5-year swaps and 5y
CDX.HY spreads
V may be calculated as:
Where,
s = the diagonal matrix of implied price volatilities for the
swaption and CDX option
C = the correlation matrix of 5-year swaps and
CDX.HY.5yr spreads
First, we must convert the swaption and CDX volatilities into
price volatilities. Note that the underlying 3m5y swap
duration is 4.7 and the underlying CDX spread duration is
4.6. Accordingly,
PX_Volswap = 65 bps x 4.7 = 3.06%
PX_VolCDX = 163 bps x 4.6 = 7.49%
Since we have no direct means to imply correlation between
CDX spreads and swap rates, we may use recent historical
correlation (in this case, 12/30/16 – 5/18/17) which was
-0.21.
Assuming equal notional weights for the CDX and swap
exposures (e.g., 100% of each), the implied portfolio volatility
would be 4.54%, which is less than the 7.62% implied price
volatility for the HYG option.
Alternatively, we may imply HYG’s spread volatility (see
Appendix for derivation). Through 5/18/17, the “I-Spread” of
HYG (i.e., the Bloomberg-derived spread of HYG’s yield to
the USD swap curve) exhibited a correlation of -0.47 relative
to 5-year swap rates. Using this correlation, implied swaption
price volatility of 3.06% and a spread level of 385 bps, the
implied credit spread volatility of HYG would have to have
been roughly 8.67% in price space, 208 bps in annualized
normal volatility and 60.4% in spread volatility in order to tie
back to the total price volatility of 7.62%.
Figure 12: HYG vs. CDX Implied Spread Volatility
This of course assumes that the 3m5y rate swaption
accurately captures all of the interest rate risk in HYG (which
it does not). Nevertheless, HYG implied spread volatility
does appear to move directionally with CDX implied volatility.
Figure 12 shows a time series of implied CDX and HYG
spread volatility.
While these observations may lead us to conclude that the
HYG option is overpriced, caution is warranted given the
structural differences mentioned earlier. Nonetheless, this
general framework provides a means to monitor the
relationships between these products and identify a
significant divergence when it occurs. An example will be
covered in the next section.
Although it is useful to calculate the implied spread volatility
in more actively traded HYG options, an important
development in the ETF options market occurred in July of
2017. Options on HYGH (the iShares Interest Rate Hedged
High Yield Bond ETF) began trading in listed
markets. HYGH is an ETF that owns HYG itself and seeks
to hedge the interest rate risk of the portfolio through the use
of interest rate swaps. To the extent that the interest rate
risk is mitigated, HYGH is essentially a spread product and
options on HYGH essentially represent options on high yield
spreads. As this market matures, investors should be able
to more directly compare spread volatility as observed
through HYGH options with options on high yield
CDX. Figure 13 shows a screenshot of HYGH options.
Figure 13: Listed Options on HYGH
𝐏𝐨𝐫𝐭𝐟𝐨𝐥𝐢𝐨 𝐕𝐨𝐥𝐬𝐰𝐚𝐩,𝐂𝐃𝐗 = 𝐰 𝐕 𝐰 ′ 𝟏/𝟐
𝐕 = 𝐬 𝐂 [𝐬]
𝐏𝐫𝐢𝐜𝐞 𝐕𝐨𝐥 = Normalized Vol x Durationfwd
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
70.0%
9/3
0/2
01
5
10/3
1/2
015
11/3
0/2
015
12/3
1/2
015
1/3
1/2
01
6
2/2
9/2
01
6
3/3
1/2
01
6
4/3
0/2
01
6
5/3
1/2
01
6
6/3
0/2
01
6
7/3
1/2
01
6
8/3
1/2
01
6
9/3
0/2
01
6
10/3
1/2
016
11/3
0/2
016
12/3
1/2
016
1/3
1/2
01
7
2/2
8/2
01
7
3/3
1/2
01
7
4/3
0/2
01
7
HYG Implied Spread Vol CDX.HY Implied Spread Vol
Source: BlackRock, Bloomberg
Source: Bloomberg as of 7/27/17
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Another useful metric is the ratio between implied vs.
realized volatility. Figure 14 shows a time series of the
implied vs. trailing 30-day realized volatility for both HYG and
CDX. While implied volatility commonly trades above
realized volatility, there are times when the relationship is
narrower or wider, indicating potential value for option
buyers or sellers.
Figure 14: HYG & CDX Implied vs. Realized
Volatility
FI ETF option applications
Relative value
As the previous discussion illustrates, the potential for
relative value trades among FI ETF options, interest rate
options and credit spread options may exist. As an example,
assume that an investor decided that HYG options were in
fact rich to a portfolio of rate and CDX swaptions. Using the
values from Figure 11, an investor could short $100 notional
of an HYG put at implied volatility of 7.62%, or a premium of
130 bps. The investor could simultaneously get long $100
notional of the CDX payer swaption for 90 bps premium and
long $100 notional of the 3m5y rate payer swaption for 63
bps premium for a total outlay of 153 bps.
Assume that the implied volatility of the HYG option falls
instantaneously to the implied volatility of the swaption / CDX
option package (i.e., the HYG option’s volatility falls from
7.62% to 4.54%). In this case, the investor could buy back
the HYG option for 78 bps, and sell the swaption/CDX option
package for a profit of 75 bps (153 bps – 78 bps). This of
course excludes transaction costs and assumes that the
value of the swaption/CDX option package would have
remained unchanged.
Yield enhancement through covered calls
An investor who wished to be long the underlying exposure
but had a view that significant upside was limited may
enhance their yield by selling an out of the money call
option. As an example, on 5/18/17 an investor who was long
HYG decided to sell the 8/18/17 89 strike calls for $0.18, or
20 bps of premium.
We note that the implied forward price for HYG for the
August expiry was approximately $87.05, so the yield would
need to fall (through some combination of interest rates and
spreads) by 60 bps on a forward basis before the option
would go into the money and 5 additional bps before the
investor would lose all of the premium proceeds that were
received5. However, assuming that the option expired
worthless, the investor would have generated additional yield
of 20 bps, or nearly 80 bps annualized (20 bps x 365/92
days to expiry) of yield.
Contingent spread widening / tightening
If investors have directional views on credit spreads, they
may be able to implement such views more cheaply with
options on credit FI ETFs than CDX swaptions. As an
example, an investor who was concerned about a risk off
environment in which interest rates would rally and spreads
widen could purchase puts on LQD (iShares iBoxx $
Investment Grade Corporate Bond ETF) and sell puts on a
similar duration US Treasury ETF such as IEF (iShares 7-10
year US Treasury Bond ETF). As an example, on 5/18/17 an
investor could have gone long the 9/15/17 119 strike LQD
puts (offered at $1.55) and gone short the 9/15/17 106 strike
IEF puts (bid at $0.90). Because of the difference in
underlying durations, the investor would have short roughly
$124 notional in IEF puts for every $100 notional long in
LQD puts, resulting in a net premium outlay of $0.44.
Figures 15 and 16, respectively, summarize the trade details
and illustrate the potential terminal value payoffs.
Figure 15: Contingent spread widening strategy
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
9/3
0/2
01
5
10/3
1/2
015
11/3
0/2
015
12/3
1/2
015
1/3
1/2
01
6
2/2
9/2
01
6
3/3
1/2
01
6
4/3
0/2
01
6
5/3
1/2
01
6
6/3
0/2
01
6
7/3
1/2
01
6
8/3
1/2
01
6
9/3
0/2
01
6
10/3
1/2
016
11/3
0/2
016
12/3
1/2
016
1/3
1/2
01
7
2/2
8/2
01
7
3/3
1/2
01
7
4/3
0/2
01
7
HYG Implied/Realized Ratio CDX.HY Implied/Realized Ratio
Source: BlackRock, Bloomberg
LQD IEF Net
Expiration 09/15/2017 09/15/2017
Spot 119.9 107.06
Strike 119 106
Put 1.55 $0.90
Long / Short Long Short
Duration 8.28 7.51
BPV 3.64 7.96
Position units 1.00 1.24 (0.24)
Wtd BPV 9.85 9.85 0
Net cost 1.55 1.11 .44
Source: BlackRock, Bloomberg
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Figure 16: Terminal value payoff matrix
The strategy could generate positive P/L in the event that
spreads widen and rates fall and negative P/L in the event
that spreads tighten and rates rise. Note that a CDX
swaption is driven only by spreads. In order to put the table
into perspective, a $117 price for LQD and a $104 price for
IEF would correspond to approximately 30 bps in spread
widening and a 38 bps increase in rates.
Portfolio protection
An investor managing a high yield portfolio was concerned
with credit spread widening. On March 1, 2017, this investor
could have purchased a put option on HYG or a payer
swaption on CDX.HY Series 27 (refer to Figure 16).
Between March 1, 2017 to March 22, 2017, HY spreads
widened by 59 bps based on the Bloomberg Barclays U.S.
Corporate High Yield Index OAS.
On 3/1/17, a 4/21/17 expiry 88 strike HYG put option (~50
delta) could have been purchased for a premium of 110 bps,
while a comparable (~50 delta) 4/19/17 expiry 107.5 strike
CDX payer swaption) could have been purchased for
approximately 59 bps (midmarket).
As of the 3/22/17 close, the HYG put option was being
quoted at a premium of 225 bps while the swaption / CDX
option portfolio was trading at a premium of 117 bps Figure
16 below summarizes the P/L of each individual option
position.
In this case, the HYG put option appreciated by 105% while
the CDX payer swaption appreciated by 98%, an
outperformance of 7%.
Figure 17: Hypothetical option P/L comparison
Conclusion
Fixed Income ETFs (“FI ETFs”) are a relatively recent, but
important innovation in the bond markets. As liquidity in fixed
income ETFs has increased, interest in options on those
ETFs has increased as well. Because fixed income ETF
options represent options on physical bond portfolios, they
provide exposures that are more highly correlated with many
fixed income investment strategies relative to derivative
instruments. Fixed income ETF options are providing
investors with an alternative way to attain contingent
exposure to various sectors including Treasuries, investment
grade credit, high yield and emerging markets. Investors are
increasingly utilizing them in strategies such as yield
enhancement (e.g., buy-write strategies), cross market
relative value (e.g., vs. CDX and interest rate swaptions) and
portfolio protection strategies. Investors are also utilizing
fixed income ETF options to achieve term financing through
synthetic borrow/lend strategies. While still an evolving
market, fixed income ETF options represent an important
new risk management tool for fixed income investors.
$ 117 118 119 120 121
104 $ (0.91) $ (1.91) $ (2.91) $ (2.91) $ (2.91)
105 $ 0.33 $ (0.67) $ (1.67) $ (1.67) $ (1.67)
106 $ 1.56 $ 0.56 $ (0.44) $ (0.44) $ (0.44)
107 $ 1.56 $ 0.56 $ (0.44) $ (0.44) $ (0.44)
108 $ 1.56 $ 0.56 $ (0.44) $ (0.44) $ (0.44)
Source: BlackRock, Bloomberg
IEF
Pri
ce
LQD Price 4/21/17
HYG
88 Strike
put
option
4/1917
107.5
Strike
CDX.HY
payer
3/1/2017
Underlying Spot PX /
Spread88.23 107.58
Ann norm vol (bps) 170 91
Premium (bps) 110 59
3/22/17
Spot PX / Yld 86.50 106.37
Ann Norm vol 192 97
Premium (bps) 225 117
P/L (bps) 115 58
Source: BlackRock, Bloomberg
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APPENDIX
1A. Example of FI ETF option valuation
In this example, we will value a 7/21/17 123 strike put option on TLT. On 5/16/17, TLT closed at a price of 123.48 and the put
option was priced at a value of $1.80, or 146 bps. Assuming forecasted distributions of $0.26, the implied price volatility of this
option is approximately 10.35%. For illustrative purposes only. This is not meant as a guarantee of any future result or
experience. This information should not be relied upon as research, investment advice or a recommendation
regarding the iShares Funds or any security in particular.
The assumptions are as follows:
Figure 18: Lattice of TLT Yields
The corresponding single period discount factors are shown below:
Figure 19: Lattice of weekly discount factors
5/26/17
Closing price $123.48
Clean price $123.27
Vol 10.35%
Duration 17.32
Convexity 3.69
Normalized vol 0.60%
Yield vol 23%
Time step 0.02
Yield increment +/- 0.083%
Forecasted dist $0.26
YTM 2.50%
Prob up move 50.39%
Prob down move 49.61%
Note that the clean price is estimated by
backing out the forecasted distribution based
upon the number of accrual days since the
prior ex-dividend date. The portfolio yield was
calculated using the Bloomberg YAS function
net of the expense ratio of 15 bps. A flat yield
curve and one factor model interest rate
model is assumed. Up and down
probabilities were based on calibration to
current observed market values. Hypothetical
future yields, discount factors, distributions
ETF portfolio values and option values are
shown in Figures 18 through 22.
5/26/2017 6/2/2017 6/9/2017 6/16/2017 6/23/2017 6/30/2017 7/7/2017 7/14/2017 7/21/2017
0 1 2 3 4 5 6 7 8
2.50% 2.58% 2.67% 2.75% 2.83% 2.91% 3.00% 3.08% 3.16%
2.42% 2.50% 2.58% 2.67% 2.75% 2.83% 2.91% 3.00%
2.33% 2.42% 2.50% 2.58% 2.67% 2.75% 2.83%
2.25% 2.33% 2.42% 2.50% 2.58% 2.67%
2.17% 2.25% 2.33% 2.42% 2.50%
2.09% 2.17% 2.25% 2.33%
2.00% 2.09% 2.17%
1.92% 2.00%
1.84%
5/26/2017 6/2/2017 6/9/2017 6/16/2017 6/23/2017 6/30/2017 7/7/2017 7/14/2017 7/21/2017
0 1 2 3 4 5 6 7 8
0.9995 0.9995 0.9995 0.9995 0.9995 0.9994 0.9994 0.9994 0.9994
0.9995 0.9995 0.9995 0.9995 0.9995 0.9995 0.9994 0.9994
0.9996 0.9995 0.9995 0.9995 0.9995 0.9995 0.9995
0.9996 0.9996 0.9995 0.9995 0.9995 0.9995
0.9996 0.9996 0.9996 0.9995 0.9995
0.9996 0.9996 0.9996 0.9996
0.9996 0.9996 0.9996
0.9996 0.9996
0.9996
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Forecasted distributions (including the amount of accrued interest at the final option expiry) are shown below:
Figure 20: Lattice of distributions
The future values of TLT (including future distributions) are shown below. Week 8 values were estimated through scenario
analysis of current holdings vs. projected period 8 portfolio yields. The price at a given node is derived by weighting the t+1 up
and down values by the up and down probabilities, adding any forecasted distribution and discounting back by the single
period discount factor).
PX(t) = ETF Price at time t
PX(t+1) = ETF Price 1 period ahead
p = probability of an up move in rates
q = probability of a down move in rates
distribution = Forecasted ETF distribution occurring in period t+1
DF(t,t+1) = discount factor for value at t of cash flow occurring at t+1
Figure 21: Lattice of ETF values
The option values corresponding to the projected fund above are shown below. Because of the American style exercise, the
value of the option at a given node will be the maximum of the intrinsic value (i.e., immediate exercise value) and the
discounted probability weighted values:
OV(t) = Option value at time t
OV(t+1) = Option value 1 period ahead
K = Option strike price
PX(t) = ETF price at t
p = probability of an up move in rates
q = probability of a down move in rates
DF(t,t+1) = discount factor for value at t of cash flow occurring at t+1
5/26/2017 6/2/2017 6/9/2017 6/16/2017 6/23/2017 6/30/2017 7/7/2017 7/14/2017 7/21/2017
0 1 2 3 4 5 6 7 8
0.26 0.26
0.26 0.26
0.26
0.26
0.26
0.26
0.26
𝐏𝐗 𝐭 = 𝐏𝐗𝐮𝐩 𝐭 + 𝟏 × 𝐩 + 𝐏𝐗𝐝𝐨𝐰𝐧 𝐭 + 𝟏 × 𝐪 + 𝐝𝐢𝐬𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧 × 𝐃𝐅(𝐭, 𝐭 + 𝟏)
5/26/2017 6/2/2017 6/9/2017 6/16/2017 6/23/2017 6/30/2017 7/7/2017 7/14/2017 7/21/2017
0 1 2 3 4 5 6 7 8
$ 123.48 $ 121.77 $ 119.82 $ 118.15 $ 116.51 $ 114.91 $ 113.35 $ 111.61 $ 110.25
$ 125.35 $ 123.35 $ 121.64 $ 119.94 $ 118.27 $ 116.62 $ 114.73 $ 113.13
$ 126.98 $ 125.22 $ 123.48 $ 121.77 $ 120.07 $ 118.15 $ 116.50
$ 128.88 $ 127.10 $ 125.34 $ 123.61 $ 121.64 $ 119.95
$ 130.80 $ 129.00 $ 127.22 $ 125.21 $ 123.48
$ 132.73 $ 130.91 $ 128.86 $ 127.09
$ 134.69 $ 132.59 $ 130.78
$ 136.41 $ 134.55
$ 138.40
𝐎𝐕 𝐭 = 𝐌𝐚𝐱[ 𝐊 − 𝐏𝐗(𝐭), 𝟎 , 𝐎𝐕 𝐮𝐩𝐭+𝟏 × 𝐩 + 𝐎𝐕 𝐝𝐨𝐰𝐧𝐭+𝟏 × 𝐃𝐅 𝐭, 𝐭 + 𝟏 ]
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Figure 22: Lattice of option payoffs
Note that the t=0 option value is $1.80. The example is strictly for illustrative purposes, and more robust term structure and
volatility models are likely to yield more accurate valuations.
5/26/2017 6/2/2017 6/9/2017 6/16/2017 6/23/2017 6/30/2017 7/7/2017 7/14/2017 7/21/2017
0 1 2 3 4 5 6 7 8
$ 1.7959 $ 2.61 $ 3.69 $ 5.02 $ 6.56 $ 8.21 $ 9.83 $ 11.39 $ 12.75
$ 0.97 $ 1.52 $ 2.34 $ 3.46 $ 4.90 $ 6.57 $ 8.27 $ 9.87
$ 0.40 $ 0.70 $ 1.20 $ 2.00 $ 3.21 $ 4.85 $ 6.50
$ 0.10 $ 0.20 $ 0.39 $ 0.77 $ 1.54 $ 3.05
$ - $ - $ - $ - $ -
$ - $ - $ - $ -
$ - $ - $ -
$ - $ -
$ -
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Implied Spread Volatility of Credit ETF
𝜎𝑠𝑝𝑟𝑒𝑎𝑑 =
𝜌𝑠𝑝𝑟𝑒𝑎𝑑,𝑟𝑎𝑡𝑒2 𝑥𝑊𝑟𝑎𝑡𝑒
2 𝑥𝜎𝑟𝑎𝑡𝑒2 + 𝜎𝐸𝑇𝐹
2 −𝑊𝑟𝑎𝑡𝑒2 𝑥𝜎𝑟𝑎𝑡𝑒
2 − 𝜌𝑠𝑝𝑟𝑒𝑎𝑑,𝑟𝑎𝑡𝑒𝑥𝑊𝑟𝑎𝑡𝑒𝑥𝜎𝑟𝑎𝑡𝑒 𝑥10,000
𝑆𝑥𝐷𝑠𝑝𝑟𝑒𝑎𝑑
Where,
𝜎𝑠𝑝𝑟𝑒𝑎𝑑 = Implied spread volatility of ETF
𝜌𝑠𝑝𝑟𝑒𝑎𝑑,𝑟𝑎𝑡𝑒 = Correlation between spread, rate
𝑊𝑟𝑎𝑡𝑒 = Weighting of swaption exposure
𝜎𝑟𝑎𝑡𝑒 = Implied price volatility % of swaption exposure
𝜎𝐸𝑇𝐹 = Implied price volatility % of ETF
S = ETF credit spread in bps (OAS or interpolated matched maturity spread)
𝐷𝑠𝑝𝑟𝑒𝑎𝑑 = Spread Duration of ETF
As an example, assume the following parameters for and HYG option and a 3m5y swaption:
𝜌𝑠𝑝𝑟𝑒𝑎𝑑,𝑟𝑎𝑡𝑒 = -0.47
𝑊𝑟𝑎𝑡𝑒 = 1
𝜎𝑟𝑎𝑡𝑒 = 3.06%
𝜎𝐸𝑇𝐹 = 7.6%
S = 385
𝐷𝑠𝑝𝑟𝑒𝑎𝑑 = 3.68
Inputting these parameters into the formula, the resulting implied spread volatility for the HYG option :
𝜎𝑠𝑝𝑟𝑒𝑎𝑑 = 60.4%
Standardized performance: As of 2/28/2018
Fund Name
All Data as of 2/28/18
Fund
Inception
Date
Gross Expense
Ratio1-Year 5-Year 10-Year
Since
Inception
iShares iBoxx $ High Yield Corporate Bond ETF
(HYG)4/4/2007 0.49%
Fund NAV Total Return 2.87% 3.89% 6.18% 5.47%
Fund Market Price Total Return 2.63% 3.81% 6.02% 5.51%
Index Total Return 3.13% 4.37% 6.79% 5.94%
iShares 20+ Year Treasury Bond ETF (TLT) 7/22/2002 0.15%
Fund NAV Total Return 0.04% 2.76% 5.65% 6.24%
Fund Market Price Total Return 0.01% 2.75% 5.66% 6.24%
Index Total Return 0.10% 2.83% 5.74% 6.33%
Source: BlackRock, as at 28 Februrary 2018. All returns are in USD. Past performance is not a reliable indicator of future performance.
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3-Year
3.33%
3.23%
3.99%
-0.39%
-0.41%
-0.33%
13EII0318A-450667-1424721
Important information regarding iShares ETFsIssued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975, AFSL 230 523 (BIMAL) for the exclusive use of the recipient, who warrants by receipt of this material that they are a wholesale client as defined under the Australian Corporations Act 2001 (Cth) and the New Zealand Financial Advisers Act 2008 respectively. This material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. Before making any investment decision, you should therefore assess whether the material is appropriate for you and obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances. This material is not intended to be relied upon as a forecast, research or investment advice. This material is not a securities recommendation or an offer or solicitation with respect to the purchase or sale of any securities in any jurisdiction.
This material is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. BIMAL is a part of the global BlackRock Group which comprises of financial product issuers and investment managers around the world. BIMAL is the issuer of financial products and acts as an investment manager in Australia. BIMAL does not offer financial products to persons in New Zealand who are retail investors (as that term is defined in the Financial Markets Conduct Act 2013 (FMCA)). This material does not constitute or relate to such an offer. To the extent that this material does constitute or relate to such an offer of financial products, the offer is only made to, and capable of acceptance by, persons in New Zealand who are wholesale investors (as that term is defined in the FMCA).
BIMAL is the responsible entity and issuer of units in the Australian domiciled managed investment schemes, including Australian domiciled iShares ETFs. BIMAL is the local agent and intermediary for non-Australian domiciled iShares ETFs that are quoted on ASX and are issued by iShares, Inc. ARBN 125632 279 formed in Maryland, USA; and iShares Trust ARBN 125 632 411 organised in Delaware, USA (International iShares ETFs). BlackRock Fund Advisors (BFA) serves as an advisor to the International iShares ETFs, which are registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940. BFA is a subsidiary of BlackRock Institutional Trust Company, N.A. (BTC). BTC is a wholly-owned subsidiary of BlackRock, Inc.®. The fund(s) detailed in this material are not registered for public distribution in Australia. The laws and regulations of the fund(s) country of domicile and registration may differ from those in Australia and therefore may not necessarily provide the same level of protection to investors as schemes registered in Australia and subject to Australian regulations and conditions.
Any potential investor should consider the latest product disclosure statement, prospectus or other offer document (Offer Documents) before deciding whether to acquire, or continue to hold, an investment in any BlackRock fund. Offer Documents can be obtained by contacting the BIMAL Client Services Centre on 1300 366 100. In some instances Offer Documents are also available on the BIMAL website at www.blackrock.com.au.
An iShares ETF is not sponsored, endorsed, issued, sold or promoted by the provider of the index which a particular iShares ETF seeks to track. No index provider makes any representation regarding the advisability of investing in the iShares ETFs. Further information on the index providers can be found in the BIMAL website terms and conditions at www.blackrock.com.au.
BIMAL, its officers, employees and agents believe that the information in this material and the sources on which the information is based (which may be sourced from third parties) are correct as at the date of publication. While every care has been taken in the preparation of this material, no warranty of accuracy or reliability is given and no responsibility for this information is accepted by BIMAL, its officers, employees or agents. Except where contrary to law, BIMAL excludes all liability for this information.
References in this article to particular ETFs are for illustrative and educational purposes only. This is not a securities recommendation to invest in any particular financial product. This material may contain historical information regarding pricing, liquidity in the primary and/or secondary market and other metrics that may affect pricing like volatility timing etc. This historical information is not predictive or an indication of (i) future trading costs or prices or (ii) any level of trade execution or (iii) a particular investment outcome, and should not be relied upon as such. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts and estimates of yields or returns. While any forward looking information in this material is made on a reasonable basis, actual future results are not guaranteed and outcomes may differ materially from the information set out in this material. No representation is made that any performance presented in this material will be achieved, or that every assumption made in achieving, calculating or presenting either the forward-looking information or the performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information that are presented herein by way of example. Reliance upon information in this material is at the sole discretion of the intended recipient. The information in this material does not necessarily reflect the views of any entity in the BlackRock Group or any part thereof and no assurances are made as to the accuracy of this information. Investors may need to seek independent advice.
Any investment is subject to investment risk, including delays on the payment of withdrawal proceeds and the loss of income or the principal invested. While any forecasts, estimates and opinions in this material are made on a reasonable basis, actual future results and operations may differ materially from the forecasts, estimates and opinions set out in this material. No guarantee as to the repayment of capital or the performance of any product or rate of return referred to in this material is made by BIMAL or any entity in the BlackRock group of companies. No part of this material may be reproduced or distributed in any manner without the prior written permission of BIMAL.
© 2018 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES and the stylised i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
FOR WHOLESALE CLIENTS ONLY – NOT FOR RETAIL OR PUBLIC DISTRIBUTION 14EII0318A-450667-1424721