The latest: iShares £ Corporate Bond 1-5yr UCITS ETF

One of the biggest concerns for fixed-income investors is a change in interest rates, since rising interest rates usually mean bond prices fall, and vice versa.

Generally speaking, the longer a bond has until it matures, the more sensitive it is to changing interest rates, as measured by the bond’s duration. Given continuing concerns about rising interest rates, there is a lot of demand for fixed income investment products that have reduced durations.

The iShares £ Corporate Bond 1-5yr UCITS ETF is an exchange-traded fund that tracks the Markit iBoxx Sterling Corporate 1-5 years index which, as the name suggests, comprises sterling-denominated corporate bonds which mature in the next one to five years, either through reaching the natural expiry date on the bond, or by being called back early.

This ETF offers investors the opportunity to invest in a low-cost passive portfolio of investment grade corporate bonds which have a lower duration compared to traditional broad corporate bond funds.

To quantify this a bit more, the reduced-duration index carries a duration of 2.9 years, one-third of the duration of the ‘parent’ index which includes the full range of sterling corporate bonds, which has a duration of 8.7 years.

The return from these investments is largely derived from the credit quality of the underlying companies issuing the bonds. This tends to result in lower risk, but also lower returns, again compared to a broad measure of corporate bonds.

There also tends to be a higher level of exposure to financials, which make greater use of short-term borrowing than other bond-issuers.

Costs on passive investments tend to be lower than for their active counterparts. The reported total expense ratio of this exchange-traded fund is 0.20%, though our own analysis, based on 12-month tracking difference, suggests the overall ‘internal’ costs of the fund are currently closer to 0.4%.

Investors looking for a passive option to access sterling-denominated corporate bonds with relatively low expected interest rate sensitivity may want to take a look at this ETF.

Ben Seager-Scott is senior research analyst at Bestinvest

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