Episode Transcript
Rachel: I think the main message around fixed income is, going back to where we started, which is the fact that income really is back across fixed income. The yields that we're able to get across, even investment grade portfolios today is super exciting. And I think one that many investors are now increasingly looking to capitalise on and lock in these yields, while still available.
Marina: Hello and welcome to FTSE Russell Convenes. My name is Marina Mets and I'm super excited to be joined for today's conversation by Rachel Siu, who is managing director and head of Canadian fixed income strategy at BlackRock. Rachel, welcome.
Rachel: Thank you so much for having me. It's great to be here.
Marina: It's fantastic. Let's dive right in. You and I have known each other for a long time. We've talked markets, talked indices, talked products for Canada for a long time. Today, I really wanted to jump into what investors are facing given today's market economics. How you're seeing where people are putting their money to work. And, any thoughts around kind of how it's evolved and, starting from the beginning for me, the market is offering a lot of challenges. Everyone is watching, I think the market volatility quite closely. There's a lot of dispersion that's entered the market today. For me, that means that risk management and understanding of what your allocation actually looks like is more important than ever before. Are you finding the same from the investors you talk to?
Rachel: Yeah, I think definitely that's been the case. We've seen certainly a lot of client interest on talking about fixed income. And I think also when you look at the flows, it's following through where we're seeing record flows into things like bond ETFs. And I think that's reflecting a couple of changes that we've seen in the market. Notably, I would say, number one, a desire to step out of cash and move back into fixed income, focusing on building core exposures, core bond exposures. And then secondly, I think recognising that we're in this pretty exciting period where yields are meaningfully higher and at very attractive levels compared to where we were just a few years ago. So I think the flows and the client conversations are really underscoring the excitement and the demand that we're seeing for fixed income globally.
Marina: I mean, at current yields, no time like the present to really deploy. And it's good to see that people have started to move off the sidelines and really reinvest. And, I think it's interesting in the way people think about yield in general. And it's always important to remind, that yield is really a representation of the income that one can expect over the lifetime of the portfolio. So, obviously I'm on the fixed income benchmarking side, doing this a long time. The FTSE Canada Universe bond index has been the kind of staple and mainstay for almost 50 years now really of what is considered to be the standard allocation for Canadian fixed income exposure. It's really been the benchmark of choice for institutional investors, retail investors, obviously, product wrappers, product issuers. And it's been an interesting evolution to watch in terms of how these benchmarks have continued to evolve to represent what is actually available to investors in the underlying market. And I find I've been doing this a long time. We take a lot of this for granted. So of course, the universe is investment grade, Govt, Corp and in Canada, its federal, provincial, municipal and all of the IG corporate issuance. And when it comes to kind of products, how much of that do you find is important for investors? How much of that are you finding that investors really try to think and understand as to the continued utilisation of this as the kind of benchmark allocation for Canadian fixed income?
Rachel: I think it's still a foundational or core part of many client portfolios today. XBB, which is the ETF that tracks the FTSE Universe Bond Index, is the largest offering that we have across our Canadian offerings. And I think it's really been a solution for investors that allows them to get access very efficiently, right to the broad Canadian bond market, right through one ticker, tracking that benchmark, giving them exposure to all the sectors that you mentioned across government, across corporates and all the underlying sectors there. And I think through the ETF wrapper, we've also seen it allow investors to really scale exposures much more efficiently through the liquidity, through the transparency. And I think cost is also becoming an increasingly component of how portfolios are implemented. So we do find that tickers like XBB and all the variations underlying it are really key part of how investors are building their portfolios. Having that core Canadian exposure is a critical part of how they build portfolios today.
Marina: I mean, it's great to hear, it's great to hear that it remains relevant for investors. I think for us, when we hear investors talk about the allocation and think about allocation, when I take a look at what is sitting in the underlying market and the continued dispersion, if you will, that kind of not concentration, but really the dispersion between the returns and the move a little bit away from the more homogenous market. I think what we've always tried to do when it came to the benchmark is to make sure that it remains representative of really the comprehensive investor choice set in the Canadian marketplace. And the market hasn't stood still at all. The market continues to evolve. New deals come to market, new issuers come to market, new trends come to market. Clearly, a few come to mind. I know from the indexing side, we've always made sure that the index continues to remain representative of that broader investor choice set. As we govern these benchmarks to make sure that investors within that index can continue to take advantage of whatever the changes are in the market. So to give the example, probably the most recent component is the inclusion of the maple issuers inside the universe bond index which is something that we consulted the market about very broadly debated and ultimately took the kind of decision to continue and to start, including those from January 25th forward. But what it's meant is that as the market has shifted and hyperscalers and AI being a huge theme and those issuers have come to market, have come to Canada to really tap issuance investors have had the opportunity to participate in that because of course, the index included those deals. What have you seen from an investor perspective? As a kind of observable shift in what it's done to the composition of the underlying.
Rachel: I do think that, as you said, the transparency around the index rules and the methodology is super important. As we have ETFs that track those benchmarks, it's very important for investors to really understand the risks and the types of exposures that they're getting through those tickers. And I think alongside the innovation of the benchmarks, really reflecting the evolution of the market, we've also really, I would say, created a suite of offerings that allow investors the broad exposure through something like XBB, which we launched back in 2000. So certainly, quite a while back.
Marina: It's the track record now.
Rachel: But since then, building out the suite across different sectors. So XEB, for example, which is the corporate part of the Canadian market, also XGB, which is a government component. So really giving investors, I would say, the ability to be modular, to be precise, around how they want to own that exposure, how much corporates versus how much governments. And then similarly, I think offering, the product range across the curve as well. I think duration is a topic that a lot of investors are talking about these days with moves across yield markets. And so having the ability to go short end of the curve, for example, through something like XSB giving the ability to stay shorter on the curve is something that I think has been interesting, but equally, having something longer duration, like XLB. Having the ability to pick and choose how much long bonds do I need? Maybe as a hedge, as a ballast, if we do see the need for it against equity risk, for example. And then recently we did launch last year, XSMB, which focuses on the 1 to 10 year part of the universe bond index. So again, allowing investors to have the ability to be more precise, picking, the front and the belly of the curve and then having the ability to adjust how much long duration they want depending on their objectives. So I think having all those building blocks, tracking the underlying indices allow investors to be precise around the risk that they're taking and building exposures based on their needs, whether it's income, as you said, whether it's building ballast or capital preservation. I think, the last one I would mention is floating rate. Also something that's come up in a higher for longer environment. So having XFR, that floating rate exposure is another interesting one for again, a step out of cash, cash alternative type of exposure that I think investors are having renewed interest in again.
Marina: Well as the environment changes, so do preferences. But it does seem like a diversified, transparent core is really kind of the starter building block. And I think both sides of the table we've had a long track record now. And I find that that matters. I find people really want something that they can refer to that has had a track record through a multitude of market cycles, a multitude of changes, so that at least you can have some semblance of the behaviour from the construction. And I know we try to provide super kind of detailed insights into the underlying because it's important to know what you own. It's important today, probably more so than it has been in recent past. But then also this idea of precision and building blocks is also, I think, really interesting to us because market cap core beta, fantastic. You're capturing the market, you're capturing the opportunity set. You're diversified across sectors, segments term the curve and that kind of encapsulates the core building block. And then, there's so much choice today for investors, but this idea that I can have control over, I want to be more in credit, I believe the credit story. I want to be more in credit or I have different set of needs. I want to go shorter. Or I really think that there's going to be an issuance patterns, and I want to take advantage of the government. Talk a little bit about how quickly and easily and the scalability of being able to put those positions on and off from an investor state. As you move through markets that are getting faster and faster and what ETFs have really added to the equation.
Rachel: I think ETFs really have been that game changer. Really allowing investors to shift from bonds that trade over the counter, to an ETF wrapper that allows them to make adjustments to their overall portfolio to add risk, to bring down risk, really on a daily intra day basis. Given how the liquidity of the ETF trades. I do think that part of why we've seen this acceleration in the momentum of bond ETF adoption, certainly in Canada, but it's a global story as well. I think it's a recognition that bond ETFs play an increasingly important role in terms of how portfolios are being constructed. It can put cash to work very quickly. It can adjust credit risk, very nimbly, and also allow investors to build strategic allocations in a very scalable, very cost efficient manner as well. And we're seeing adoption by different types of investors, institutions, certainly as well as wealth investors recognising, I would say, the benefits of the wrapper. Specifically in fixed income, I would say the transparency and the liquidity are key elements of why we've seen that growth.
Marina: I think that's fantastic. I think this idea of being able to have control over your exposures and then have control over how you achieve those exposures. And then being able to do that in an easy and a transparent wrapper has been a game changer for many people. And it's exciting to see that you're seeing the flows and the flows come back into fixed income. We're certainly seeing that as a trend that continues and continuing to support. As we sit here today and looking out into the future, what is the one takeaway that you would think investors should be able to walk away from? In terms of, let's say both the kind of allocation, how they view fixed income in their portfolio, but also the one message that you think they can take away from you today.
Rachel: Yeah. I think the main message around fixed income is going back to where we started, which is the fact that income really is back across fixed income. The yields that we're able to get across, even investment grade portfolios today is super exciting. And I think one that many investors are now increasingly looking to capitalise on and lock in these yields while still available. And I think when it comes to implementation, I think it's understanding the benefits that bond ETFs can really play and having, I would say, a core exposure to Canadian offerings makes a ton of sense to us for a Canadian investor having that foundational core through something like XBB. Getting the broad universe bond exposure in one ticker is something that I think is super interesting.
Marina: And look, Canada is an interesting market. We've certainly seen with the recent issuance and the kind of recent changes that Canada is playing on the global stage as an interesting market, not just for Canadian investors, but more broadly. And you definitely said it right, putting the income back in fixed income. Rachel, thank you so much for spending time with me today, as always, a brilliant conversation.
Rachel: Thank you, Marina.
Marina: And everyone, thank you so much for joining us today.
