daniel prince, cfa head of ishares product consulting€¦ · head of ishares product consulting...

Finding income……..with ETFs!

Daniel Prince, CFA

Head of iShares Product Consulting

March 2019

ICRMH0319U-756605-1/24

Seeking income with ETFs

The retiree income dilemma

Today’s income challenge

Building better income

portfolios with ETFs

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The psychology of retirement income

Retirees are reluctant to spend principal and sell securities for income. This could negatively impact the

quality of their retirement. Building portfolios that seek to generate income may help.

Source: Based on BlackRock Retirement Institute – Nov 2017. A sample of 7,148 retiree households provided self-reported asset data and out-of-pocket medical expenditure and

a subsample of 1,660 households provided the household expenditure data. Retirees were segmented into three groups based on pre-retirement non-housing retirement assets

— $0 to less than $200,000 (lowest wealth), $200,000 to less than $500,000 (medium wealth) and $500,000 and above (highest wealth).

*Inclusive of all three wealth bands (lowest, medium, and highest per source)

THE CAUSE

Three reasons retirees are spending less

Longer life expectancy

THE EFFECT

Retirees are reluctant to spend principal across all wealth bands

2017 BlackRock Retirement Institute study

1

Investors across the wealth spectrum may benefit from an income seeking portfolio

2

3

82 At age

Retirees still retain

17 Years into retirement

of their nest egg* 77%

2018

85 78 1980

Less income

Lower return expectations

retirees with

defined benefit plans 2014

2% 28% 1979

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Investors are still in a lot of cash…

Source: BankRate.com using national averages for savings accounts, money

market accounts, and 1-year CD rates as of 3/1/19. Inflation represented by 1-year

change in the consumer price index as of January 31, 2019.

Past performance does not guarantee future results.

Source: BlackRock Global Investor Pulse Survey 2017. Based on a survey of

4,000 individual US investors. On average, Americans hold 58% of their liquid

investible assets in cash.

Cash yields have not

kept pace with inflation

On average, Americans hold 58% of their

liquid investible assets in cash

5

0.10% 0.21%

0.88%

1.60%

SavingsAccounts

MoneyMarket

Account

1-year CD Inflation

Cash

58%

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Yields remain below historical averages

Percent of fixed income markets yielding over 4%

U.S. Treasury

Euro Core

U.S. Agencies

U.S. Municipal

Euro Periphery

U.S. MBS

Global Credit

U.S. CMBS

Emerging Market

Global High Yield

100%

75%

50%

25%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Don’t be lulled by the rise in short term rates. It’s still hard to find 4% yield.

Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one

cannot invest directly in an index. Past performance does not guarantee future results.

Source: BlackRock Investment Institute, Barclays and Thomson Reuters, December 2018. The bars show market capitalization weights of assets with an average annual yield over 4% in a

select universe that represents about 70% of the Bloomberg Barclays Multiverse Bond Index. U.S. Treasury represented by the Bloomberg Barclays U.S. Treasury index. Euro Core is

based on the Bloomberg Barclays French and German government debt indexes. U.S. Agencies represented by Bloomberg Barclays U.S. Aggregate Agencies index. U.S. Municipal

represented by Bloomberg Barclays Municipal Bond index. Euro Periphery is an average of the Bloomberg Barclays government debt indexes for Italy, Spain and Ireland. U.S. MBS

represented by the Bloomberg Barclays U.S. Mortgage Backed Securities index. Global Credit represented by the Bloomberg Barclays Global Aggregate Corporate index. U.S. CMBS

represented by the Bloomberg Barclays Investment Grade CMBS index. Emerging Market combines the Bloomberg Barclays EM hard and local currency debt indexes. Global High Yield

represented by the Bloomberg Barclays Global High Yield index.

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Look beyond bonds for income

But know that high income assets can be volatile. Concentrated positions come with downside risk. Relative value can

change quickly across asset classes.

3.8% 5.6% 5.5%

6.7% 6.6%

-11.9%

-6.5%

-2.1%

-23.1%

-5.1%

Index performance is for illustrative purposes only and do not predict or depict the yield of any fund. Index performance does not reflect any management fees, transaction

costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Data represents past performance and is no guarantee future results.

Source: Morningstar and Bloomberg, yields as of 12/31/18. Data is covers 1/1/2012 through 12/31/18. Yields for the various asset class indices have material differences including

investment objectives, liquidity, safety, guarantees of insurance, fluctuation of principal or return and tax features. Fixed income yields represented by yield-to-worst, equity yields by 12

month dividend yield while MLPs' yield consists primarily of return of capital which reduces the investors adjusted cost basis, the composition of which varies based on income, expenses,

depreciation and tax elections made by the MLP based on each investor’s share of the MLP’s income, expenses, gains and losses. Yield data based on month-end numbers. Average

annual drawdown is the average of the largest declines in value from peak to trough during each of the following periods: 2012, 2013, 2014, 2015, 2016, 2017 & 2018. Additional annual

drawdowns are added following an equity drawdown greater than 5% or at the close of a calendar year depending on which occurs first.

2.1% 2.0% 2.4% 3.2% 4.0% 6.4%

-5.0%

-9.5%

-2.7% -3.6%

-9.7%

-5.1%

Traditional sources of income (1/1/2012 – 12/31/2018)

Non-traditional sources of income (1/1/2012 – 12/31/2018)

Avg.

annual

drawdown

Avg.

yield

U.S.

Treasuries

S&P

500 Bloomberg

Barclays

Aggregate

Inv.

Grade

Debt

Dividend

Equities

High

Yield

U.S.

REITS

Emerging

Market Debt

Bank

Loans

Master

Limited

Partnership

Preferred

Stocks

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Demand for fixed income ETFs has grown

U.S. Bond ETF AUM $631 B

$0

2002 iShares launches first Bond ETF,

iShares iBoxx $ Investment Grade

Corporate Bond ETF (LQD)

LQD

U.S. Bond ETF growth is remarkable…

ETFs as % of U.S. bond market

* Entire universe of the U.S. bond market.

Source: Bloomberg, as of 12/31/2018.

U.S. bond market*

$53.2 trillion

Source: Bloomberg 12/31/2018 – Universe denominated by BBG Barclays

Multiverse Market Value.

U.S. bond ETFs

$631B (1.19%)

2002 2004 2006 2008 2010 2012 2014 2016 2018

…with room to grow

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The income ETF toolkit

What is the role of income in your portfolio?

IUSB AGG HYG MUB PFF LQD DGRO

Core bonds and municipals High yield and preferred

Help diversify risk Seek increased income

Short duration strategies

Put cash to work

EMB NEAR IGSB FLOT ISTB

HDV

10

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment

strategy. There is no guarantee that any strategies discussed will be effective.

ICRMH0319U-756605-10/24

-40

-20

0

20

1990 2000 2001 2002 2008 2018

11

Diversify equity

Core bonds can help diversify Negative stock market calendar years, 1989-2018

“Help diversify risk”

S&P 500 Index

Bloomberg Barclays U.S. Aggregate Bond Index

Re

turn

(%

)

Growth of the P/E ratio of the S&P 500 Index

0

500

1000

1500

2000

2500

3000

Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction cos ts or expenses. Indexes are unmanaged

and one cannot invest directly in an index. Past performance does not guarantee future results.

S&P 500 growth chart source: Bloomberg as of 2/28/2019. P/E ratios of the S&P 500 Index as of 1/1/2007 and 1/1/2019. Bonds ve rsus stocks performance source: Morningstar. As of

12/31/18. Past performance does not guarantee or indicate future results. Bond returns represented the Bloomberg Barclays U.S . Aggregate Index from 1989 (when the index came

into existence) to 2018. Stock returns represented by the S&P 500 Index from 1989 to 2019 for comparative purposes. It is not possible to invest directly into an index.

2007 P/E ratio

17.36

2019 P/E ratio

19.96

0.01%

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Help diversify equities “Help diversify risk”

iShares Core U.S.

Aggregate Bond ETF

iShares Core Total USD

Bond Market ETF

iShares iBoxx $

Investment Grade

Corporate Bond ETF

60% AGG

40% LQD

Correlation to S&P 500 -0.17 -0.15 0.17 0.00

Return* 2.00% 2.73% 3.27% 2.51%

Risk* 2.88% 2.67% 4.43% 3.35%

AGG IUSB LQD

Keep correlations low while seeking attractive total return

Diversify

Equities

*Source: BlackRock as of 12/31/18. Risk and Return based on 3-year annualized NAV return and standard deviation ending December 31, 2018. This information should not be relied

upon as research, investment advice or a recommendation regarding the Funds or any security in particular. This information is strictly for illustrative and educational purposes and is

subject to change. This information does not represent the actual current, past or future holdings or portfolio of any BlackRock client.



Past performance does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an

investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher

than the performance quoted.

With the stock market near record highs, bond diversification may be more important than ever.

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IUSB AGG MUB LQD

Core bonds and municipals

Help diversify risk


Put cash to work

NEAR IGSB FLOT ISTB

13



HYG PFF DGRO

High yield and preferred

Seek increased income

EMB

HDV

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Diversify beyond high yield bonds

Consider diversifying beyond high yield bonds with preferred stocks and EM bonds.

$252

$86

$17

2 Source: Morningstar. As of 12/31/18. Past performance does not guarantee future results. Investment

return and principal value of an investment will fluctuate so that an investor’s shares, when sold or

redeemed, may be worth more or less than the original cost. Current performance may be lower or

higher than the performance quoted. For standardized performance, see appendix.

This information should not be relied upon as research, investment advice or a recommendation regarding the

Funds or any security in particular. This information is strictly for illustrative and educational purposes and is

subject to change. This information does not represent the actual current, past or future holdings or portfolio of

any BlackRock client.

* Based on 30-day SEC yield, 5 year standard deviation and 5 year correlation. Portfolio blend is represented by an

equal weight blend of: EM Bonds, iShares J.P. Morgan USD Emerging Markets Bond ETF; High yield bonds, iShares

iBoxx $ High Yield Corporate Bond ETF; Preferred stocks, iShares U.S. Preferred Stock ETF. High yield alone is

represented by Morningstar High Yield Bond category average (mutual funds only).

Many investors fail to look

beyond high yield

Fund AUM¹ (billions)

Preferred stocks and EM bonds

complement high yield bonds²

High yield

bonds

EM bonds Preferred

stocks

High yield

bonds

EM bonds

Preferred

stocks

Blend High yield

alone*

Better diversification

(Correlation to S&P 500)* 0.54 0.69

Higher yield* 6.42% 6.24%

Lower standard deviation* 4.26% 4.78%

“Seek increased income”

HYG EMB PFF

14

1 Source: Morningstar. As of 12/31/18. Based on the Morningstar category AUM

of Emerging Market Bonds and Emerging Markets Local Currency Bond, High

Yield Bond and Preferred Stock.

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Help boost your equity income with dividends

The investors’ dilemma – protect principal or roll the dice in the equity market.

Dividends can potentially provide income and downside protection.

Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and

one cannot invest directly in an index. Past performance does not guarantee future results.

Source: Morningstar, Bloomberg as of 12/31/2018, uses the Morningstar US Dividend Growth Index to represent dividend growers and the Morningstar US Dividend Yield Focus Index

to represent dividend yielders. Up/down-capture measures relative performance in up and down markets. Up-capture shows how much one index gains relative to a benchmark when

the benchmark rose. Down-capture shows how much one index lost relative to a benchmark when the benchmark declined. There is no guarantee that any fund will pay dividends.

Dividends can potentially

boost income…

Trailing 12 month dividend yield,

as of 12/31/18

…and potentially provide

downside protection

Upside/downside capture ratios,

10 years vs. S&P 500

As of 12/31/18

2.0% 2.4%

3.7% 100%

-100%

93%

-85%

78%

-64%

S&P 500 Dividend

growers

Dividend

yielders

S&P 500 Dividend

growers Dividend

yielders


15 ICRMH0319U-756605-15/24

DGRO - iShares Core Dividend Growth ETF

1 Source: BlackRock. Fund holdings as of 12/31/18, subject to change.

*(companies with the highest dividend yields)


Verizon Communications 2.95%

J.P. Morgan Chase 2.93%

Apple 2.92%

Microsoft 2.91%

Chevron 2.77%

Pfizer 2.68%

Johnson & Johnson 2.63%

Wells Fargo 2.43%

Proctor & Gamble 2.41%

Abbvie 2.07%

The index identifies U.S. companies that are growing

dividends through using the following screening methods

5+ years of

consistent

div. growth

Exclude top

decile div.

payers*

Earnings

payout ratio

<75%

Security

weighting

<3%

U.S. Dividend

Growth

Universe of U.S. Stocks

DGRO has a dividend weighted portfolio – growth focus

400+ U.S. companies

with growing dividends1

Morningstar US Dividend Growth Index

DGRO

16 ICRMH0319U-756605-16/24

HDV – iShares Core High Dividend ETF

1 Source: BlackRock. Fund holdings as of 12/31/18, subject to change.

Exxon Mobil Corp 9.49%

Verizon Communications 7.60%

Johnson & Johnson 6.58%

Chevron 6.26%

Pfizer 6.04%

Procter & Gamble 5.43%

Coca-Cola 4.47%

Altria Group 4.33%

Cisco Systems 4.21%

Pepsico 3.84%


Identify high dividend paying US companies with

sustainable business models and good financial health

Dividend

Yield

Financial

Health

Economic

Moat

Security

Weighting

<10%

U.S. High

Dividends

Universe of U.S. Stocks

Dividend weighted portfolio – quality focus

75 High-quality U.S.

companies1

HDV

Morningstar Dividend Yield Focus Index

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IUSB AGG MUB LQD

Core bonds and municipals

Help diversify risk

18



HYG PFF DGRO

High yield and preferred

Seek increased income

EMB

HDV


Put cash to work

NEAR IGSB FLOT ISTB

ICRMH0319U-756605-18/24

iShares short duration ETFs “Put cash to work”

Rates have risen, but mostly on the short end. This means short term bonds may provide attractive

yields and more downside protection relative to long-term bonds.

FLOT iShares Floating

Rate Bond ETF NEAR

iShares Short Maturity

Bond ETF (Active)

IGSB iShares 1-3 Year

Credit Bond ETF ISTB

iShares Core 1-5 Year

USD Bond ETF

Getting started with

iShares short duration bond ETFs

Short-term bonds

Ultra-short bonds

Where rates were

Dec. 15, 2015

Fed begins raising

interest rates

Where rates are

Dec. 31, 2018

0.98%

2.38% 1.40%

2.31%

2-Year

Treasury

4.69%

2.38%

“Cushion”

Increase

in yield 0.98%

Where interest rates

would have

to go to lose money*

Higher interest rates More downside

protection

* "Where rates would have to go to lose money" assumes the bond is not held to maturity. If you hold a bond or treasury to maturity and the issuer did not default, you will

get the principal value back.

Source: BlackRock and treasury.gov as of 12/31/18. Cushion depicts the amount that interest rates would need to rise over the course of 12 months for principal loss on the bond to

outweigh the yield generated, based on the market price of the bond. Interest rates and bond prices have an inverse relationship. For example, bond prices decrease when interest rates

increase because the fixed interest and principal payments stated in the bond become less attractive to investors.

This information should not be relied upon as research, investment advice or a recommendation regarding the Funds or any security in particular. This information is strictly for illustrative

and educational purposes and is subject to change. This information does not represent the actual current, past or future holdings or portfolio of any BlackRock client.

19

Interest rates, then and now

ICRMH0319U-756605-19/24

Key takeaways

1 2 3

Know what you own

Income is challenging

in today’s

investment landscape

Don’t over reach for yield

– Stay Diversified

Leader. Expert. Partner.

Explore all 329 commission-free* iShares ETFs at

fidelity.com/etfs/ishares

*ETFs are subject to a short-term trading fee by Fidelity, if held less than 30 days.

Before engaging Fidelity or any broker-dealer, you should evaluate the overall fees and charges of the firm as well as the services provided. BlackRock compensates Fidelity in connection

with an exclusive long-term marketing program that includes promotion of select iShares Funds and inclusion of select iShares Funds in certain trading platforms and investment programs.

Additional information can be found in the ETFs’ prospectuses and related documents. Fidelity may add or waive commissions on ETFs without prior notice. Other conditions and fees may

apply. See www.Fidelity.com/commissions for details. BlackRock is not affiliated with Fidelity or any of their affiliates.

20 ICRMH0319U-756605-20/24

Appendix

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Important notes

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other

information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by

visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values.

Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt

securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-

rated securities. There may be less information on the financial condition of municipal issuers than for public corporations. The market for municipal

bonds may be less liquid than for taxable bonds. Some investors may be subject to federal or state income taxes or the Alternative Minimum Tax (AMT).

Capital gains distributions, if any, are taxable.

Securities with floating or variable interest rates may decline in value if their coupon rates do not keep pace with comparable market interest

rates. The iShares Floating Rate Bond ETF's income may decline when interest rates fall because most of the debt instruments held by the

Fund will have floating or variable rates. Funds that concentrate investments in specific industries, sectors, markets or asset classes may

underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market. Shares of

ETFs trade at market price, which may be greater or less than net asset value. Actively managed funds do not seek to replicate the

performance of a specified index. Actively managed funds may have higher portfolio turnover than index funds. The iShares Short Maturity

Bond ETF will invest in privately issued securities that have not been registered under the Securities Act of 1933 and as a result are subject to

legal restrictions on resale. Privately issued securities are not traded on established markets and may be illiquid, difficult to value and subject

to wide fluctuations in value. Delay or difficulty in selling such securities may result in a loss to the iShares Short Maturity Bond ETF. The fund

may invest in asset-backed (“ABS”) and mortgage-backed securities (“MBS”) which are subject to credit, prepayment and extension risk, and

react differently to changes in interest rates than other bonds. Small movements in interest rates may quickly reduce the value of certain ABS

and MBS.

Real estate investment trusts (“REITs”) are subject to changes in economic conditions, credit risk and interest rate fluctuations. Investment in a fund of

funds is subject to the risks and expenses of the underlying funds.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of

substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing

markets and in concentrations of single countries.

Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged

to distribute portfolio gains to shareholders.

Diversification and asset allocation may not protect against market risk or loss of principal. The strategies discussed are strictly for illustrative and

educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no

guarantee that any strategies discussed will be effective.

22 ICRMH0319U-756605-23/24

Important notes continued

Preferred stocks are not necessarily correlated with securities markets generally. Rising interest rates may cause the value of the Fund’s investments to

decline significantly. Removal of stocks from the index due to maturity, redemption, call features or conversion may cause a decrease in the yield of the

index and the Fund. There is no guarantee that any fund will pay dividends.

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce

returns. Market returns are based upon the midpoint of the bid/ask spread at 4:00 p.m. eastern time (when NAV is normally determined for most ETFs),

and do not represent the returns you would receive if you traded shares at other times.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Markit Indices Limited, Morningstar, Inc or S&P Dow Jones Indices LLC.

None of these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies

listed above.

©2019 BlackRock. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their

respective owners.

The information provided in this communication is solely for educational purposes and should not be construed as advice or an investment

recommendation. Fidelity Investments is a separate company, unaffiliated with BlackRock, Inc.. There is no form of partnership, agency affiliation, or

similar relationship between BlackRock, Inc. and Fidelity Investments, nor is such a relationship created or implied by the information herein. Fidelity

Investments has not been involved with the preparation of the content supplied by BlackRock, Inc. and does not guarantee or assume any responsibility

for its accuracy or completeness.

23 ICRMH0319U-756605-24/24

daniel prince, cfa head of ishares product consulting€¦ · head of ishares product consulting...

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