the journey to $1 trillion. · bond etfs today are already known for their competitive performance,...

THE JOURNEY TO$1 TRILLION.Visualizing the meteoricrise of bond ETFs

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HOW THE BONDETF CHANGEDTHE GAME.

Not long ago, getting exposure to fixed income securities, such as bonds, was cumbersome and highly specialized.

Despite the bond market being significantly bigger than the equities market, bonds still largely trade over-the-counter (OTC) and not on a centralized exchange. This means bonds are typically harder to access, in contrast to stocks.

Traders used to mostly trade bonds over the phone, negotiating prices and making deals.

However, this “old school” method came with several limitations:

However, the innovation of the bond exchange-traded fund (ETF) was an inflection point for the industry.

Bond ETFs trade on open exchanges like stocks, making them more accessible to investors.

Over the last two decades, they’ve helped to transform and democratize the bond market. Let’s take a look at how this rapidly rising segment of the market took off, and what the future may hold for bond ETFs.

High transaction costs

To gain access to the bond market, investors traditionally had two options:

Information was proprietary

Bonds were not always liquid

The market lacked true transparency

buying actively-managed mutual funds

buying individual bonds themselves—often a time-consuming and inefficient process.

1 2

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$1 TRILLIONAND BEYOND.A timeline of the journey to $1 trillion in global assets under management (AUM).

The ETF shakes up the fixed income market and bond ETFs launch for the first time in the U.S.

Here is how the bond ETF market works:

2002A new way to trade bonds

Authorized ParticipantsBuyers and sellers can transact with each other through the exchange

ExchangeBuy & Sell

ETF Shares

Cash

ETF Shares

Cash

Seller

Primary Market Secondary Market

Creation

Redemption

ETF issuer

Buyer

buy or sell underlying bonds that make up the fund

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Gave investors easy exposureto government bonds (such as Treasuries), which historically are a low volatile investment*

Government bond ETFs

Funds that hold Treasury Inflation- Protected Securities (TIPS), which are indexed to inflation

TIPS ETFs

Investment-grade* corporate bonds derive from companies with a low risk of default

Corporate bond ETFs

Seeks to track the Bloomberg Barclays U.S. Aggregate Bond Index, an important indicator that aims to replicate the overall size and scope of the investable bond market

Aggregate bond ETFs

Just one year in, and there are already numerous types of bond ETFs that allow investors to fulfill different needs:

Investors could now harness the simplicity of ETFs to buy different types of bonds, typically used to:

2003More variety

Diversify portfoliosfrom stock market risk

Seek stability frominterest rate risk

Target consistentincome

*Rating signifying high credit quality, implying a low risk of default

*Low volatility based on high credit rating which typically has a low risk of default

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$25billionThe global bond ETF industry

hits $25 billion in AUM.

2006Achievement unlocked

The universe of bond ETFs continues to expand as investors demand access to even more kinds of bonds.

2007Bond ETF innovations

Investments representing an ownership in a pool of many mortgages

Higher-yielding corporate bonds

Exposure to municipal bonds issued by cities, states, counties, or other local governments

Mortgage-backedsecurity bond ETFs

High yield bond ETFsMuni bond ETFs

Source: BlackRock GBI (as of June 2019)

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Liquidity for individual bonds dries up during the 2008 Financial Crisis.

However, bond ETFs help provide a new source of liquidity and volume increases, allowing investors to efficiently access the fixed income markets.

2008A new source of liquidity

Largest high yield bond ETF price

volume

Source: Bloomberg (12/31/07-6/30/09). Volume shown is daily trading volume. Largest high yield bond ETF is represented by the iShares iBoxx $ High Yield Corporate Bond ETF (ticker: HYG). Based on the fund's AUM ($17.7B) as of 6/30/19. For illustrative purposes only. There can be no assurance that an active trading market for shares of

an ETF will develop or be maintained. Past performance does not guarantee future results.

$100

$90

2.5M

2.0M

1.5M

1.0M

0.5M

$80

$70

$602008 2009

2008 2009

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The first term-maturity ETFs launch.

These special bond ETFs specifically hold bonds that all mature in the same year. In the year of maturity, the funds liquidate and return the proceeds to investors.

2010More precise strategies

At this time, factor-based bond ETFs start to hit the mainstream.

Factor-based bond ETFs use a rules-based approach to employ multiple investment factors, such as:

They are transparent andsystematic, but also giveinvestors precise exposureand sophistication to helpachieve their objectives.

2015More product innovation

Low Volatility Quality

MomentumValue





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In the U.S., iShares iBoxx $ High Yield Corporate Bond ETF (ticker: HYG) trades more than 24 of the 30 stocks in the Dow Jones Industrial Average.*

In Europe, banks turn to bond ETFs for exposure, and MiFID II regulations come into effect.

Key bond ETFs start to trade at higher volumes than many of the most actively traded stocks.

2018Unprecedented volume

Green bonds

2017Green bond ETFs provide investors withthe ability to invest in bonds that are tiedto sustainability purposes.





*Source: Bloomberg, BlackRock, S&P Dow Jones, as of 12/31/18. Volume based on full-year average. There can be no assurance an active trading market for shares of an ETF will develop or be maintained.

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2018Market volatility and bond ETFs

In the second half of 2018, markets get volatile, and investors turn to bond ETFs to help reduce their overall portfolio risk, specifically diversifying their exposure to stocks.

Hypothetical growth of $100

iShares U.S. Treasury Bond ETF (ticker: GOVT) volume35M25M

15M5M

2019Dec Mar Apr May JunNovOctSepAugJul

2019Dec Mar

Feb

Feb Apr May JunNovOctSepAugJul

$1trillionIn June 2019, bond ETFs hit $1 trillion in

global assets under management, with now over 1,300 bond ETFs available globally.



$115

$110

$105

$100

$95

$90

$85

S&P 500 Index

ICE U.S. Treasury Core Bond Index

Source: Bloomberg (7/1/18-6/30/19). Volume shown is daily trading volume. 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. Index performance does not represent actual iShares Fund performance. For actual fund performance, please visit www.iShares.com or www.blackrock.com.

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THE PATH TO$2 TRILLION.

Why do institutionalinvestors turn to bond ETFs?

According to Greenwich Associates, there are three reasons*:

Bond ETFs today are already known for their competitive performance, low cost, and tax efficiency.

As the future unfolds, innovations will likely continue. This could allow all types of investors—from individuals to wealth managers, to institutions—to continue finding different ways to use bond ETFs in their portfolios.

83% of respondentssay liquidity drives their use of bond ETFs.

Liquidity Ease of Use Quick Access

In just 17 years, bond ETFs have grown to be a significant part of the investment universe.

According to BlackRock, global bond ETF assets will double to $2 trillion by 2024.


*Source: Greenwich Associates 2018 U.S. Exchange-Traded Funds Study. Based on 108 respondents. Study sponsored by BlackRock.

2002 2005 2009 2013 2017 2019YTD

2024

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visualcapitalist.com@visualcap/visualcapitalist

Learn more about the future of bond ETFs at iShares.com

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. Mortgage-backed securities ("MBS") and commercial mortgage-backed securities ("CMBS") are subject to prepayment and extension risk and therefore react differently to changes in interest rates than other bonds. Small movements in interest rates may quickly and significantly reduce the value of certain mortgage-backed securities. TIPS can provide investors a hedge against inflation, as the inflation adjustment feature helps preserve the purchasing power of the investment. Because of this inflation adjustment feature, inflation protected bonds typically have lower yields than conventional fixed rate bonds and will likely decline in price during periods of deflation, which could result in losses. Government backing applies only to government issued securities, and does not apply to the funds.

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 than the general securities market.

A fund's environmental, social and governance (“ESG”) investment strategy limits the types and number of investment opportunities available to the fund and, as a result, the fund may underperform other funds that do not have an ESG focus. A fund's ESG investment strategy may result in the fund investing in securities or industry sectors that underperform the market as a whole or underperform other funds screened for ESG standards.

There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics ("factors"). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.

Buying and selling shares of ETFs will result in brokerage commissions. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). BlackRock is not affiliated with Greenwich Associates LLC.

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Markit Indices Limited. Markit Indices Limited does not make any representation regarding the advisability of investing in the Funds. BlackRock Investments, LLC is not affiliated with the companies listed above. ©2019 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

ICRMH0819U-894824-11/11

the journey to $1 trillion. · bond etfs today are already known for their competitive performance,...

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