A Roadmap for Defensive Investing

Winding Road

While the 2019 market rebound has undone much of the damage from 2018’s year-end drubbing, the brutal selloff offers a key reminder for investors about portfolio management, specifically the importance of having defensive exposures.

The selloff from October 3rd to December 24th dragged the S&P 500 Index down by 20% and the Russell Small-cap index more than 24% (Source: Bloomberg). This was driven primarily by fears of continued rate hikes by the Federal Reserve, valuation concerns and worries about a global growth slowdown.

These large draw-downs are a far cry from the relatively quiet markets seen in recent years, which drove investors to seek exposures to pro-cyclical market areas such as momentum stocks or high yield credit. As investors adjust to a lower growth paradigm, investors may want to consider exposures that either offer limited downside protection such as minimum volatility strategies or that move less in sync with equity and bonds such as in commodities

ETF Flows

Indeed, investors are taking notice of the importance of defensive positioning. Even with the rebound in stocks this year, our research shows that flows into defensive exchange traded products are outpacing flows into all products as a percentage of assets under management.  U.S. listed fixed income ETFs have garnered nearly twice as much as equity flows year to date. Minimum volatility strategies are attracting the biggest flows this year among factors, gaining $5.78 billion, while momentum has seen nearly $0.6 billion in outflows (Source of flow data: Markit, BlackRock as of March 14, 2019.)

Building a buffer

Here are a few ways investors can add targeted defensives exposures to their portfolios.

1. Equities

Minimum volatility strategies historically have reduced risk in down markets compared to the broader market and Q4 2018 was no exception. The MSCI USA Minimum Volatility Index outperformed the S&P 500 Index by more than 600 basis points (bps, or 6%) in the fourth quarter of 2018. Min vol also worked well in other regions: The MSCI Emerging Markets Minimum Volatility Index outperformed the MSCI Emerging Markets Index by more than 900 bps in 2018.[1]It is worth noting that minimum volatility strategies historically have tended to perform well both in growth slowdowns and in outright recessionary market conditions. Investors may also want to consider high quality dividend paying stocks, which can offer potential income as well as some resilience in down markets as well as adding so-called “safe haven” countries such as Switzerland and Japan.

2. Fixed Income

The Federal Reserve has raised interest rates nine times since the tightening cycle began 2015. Investors, who were looking to take advantage of those hikes added exposures to short-term fixed income assets. However, with the market expecting just one more rate hike 2019, investors concerned with slowing growth or geopolitical turmoil may want to consider longer duration Treasurys (ten years or longer). Historically, these have offered some buffer for portfolios in serious market downturns, as well as a chance to potentially pick up some extra yield.

3. Commodities

Historically, commodities have tended to provide meaningful diversification and inflation hedging benefits.

Correlations

For example, from April 1991 to March 2019, the annual returns of the S&P GSCI Index have had just a -0.13 correlation to the US Treasury 10 year benchmark index and a 0.25 correlation to the S&P 500 Index.[2]

In addition, many commodity assets, such as gold, are priced in dollars, and historically have performed in line with an increase in inflation expectations. Therefore, they may serve as an inflation hedge in a portfolio. In the current environment we don’t expect a major increase in inflation, but holding inflation hedges.

Some may question where cash fits into a defensive portfolio: While investors generally hold relatively high levels of cash, as the BlackRock Investor Pulse survey has shown, this buffer is increasingly being reallocated to other high quality fixed income options such as U.S. Treasuries as a way to earn incrementally higher yield.

Let’s be clear: Seeing your portfolio decline in value is never fun, and losing less money than the market at large offers little solace. But over the long term, creating a buffer from the downswings – known as “downside protection” can add value to a portfolio.

There’s an old saying, “You should fix your roof when the sun shines.” We don’t expect a recession in 2019, we still believe stocks will continue to climb and we prefer them over bonds. But the kind of volatility we saw in the fourth quarter could reappear, the result of any number of unforeseen events. When or if that occurs, it would be wise to ready.

 

Chris Dhanraj is the Head of the iShares Investment Strategy team and a regular contributor to The Blog.

 

[1] Source: Bloomberg, as of 12/31/18.

[2] Correlation measures how two securities move in relation to each other. Correlation ranges between +1 and -1. A correlation of +1 indicates returns moved in tandem, -1 indicates returns moved in opposite directions, and 0 indicates no correlation.

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.

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.

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. 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. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

Investing in commodity-linked derivatives and commodity-related companies may increase volatility. Price movements are outside of the fund’s control and may be influenced by weather and climate conditions, livestock disease, war, terrorism, political conflicts and economic events, interest rates, currency and exchange rates, government regulation and taxation.

A fund’s use of derivatives may reduce a fund’s returns and/or increase volatility and subject the fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. A fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited.  There can be no assurance that any fund’s hedging transactions will be effective.

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.  The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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

The Surprising Way the Bond Market Matters for Stocks

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One of the reasons stocks have done as well as they have in 2017 is that earnings growth has rebounded. Unlike recent years, when stocks were driven largely or exclusively by multiple expansion—i.e. investors willing to pay more per dollar of earnings—this year’s gains have come from companies actually producing stronger earnings. This is supportive of the market.

What is less supportive is the cumulative effect of years of multiple expansion, a trend that has left U.S. equities expensive by most metrics. Whether or not stocks can continue to sustain current valuation is partly dependent on what happens in the bond market, but just not in the way many people think.

When comparing stocks to bonds, investors typically focus on the relationship between interest rates and equity multiples. This is both empirically evident and based on basic finance, i.e. a lower discount rate supports higher valuations. Unfortunately, this relationship has been less relevant in the post-crisis environment of already low rates. Instead, investors need to focus on two more nuanced measures: the term premium and bond market volatility.

Low or negative term premium

The term premium measures the marginal return to investing in a long-dated bond versus constantly rolling a series of shorter maturity instruments. While normally positive, it has been unusually low or negative in recent years.

Term Premium Equity Valuations

This is important. Since 2010 the term premium has explained roughly 40% of the variation in the S&P 500 earnings multiple (see the chart below). Price-earnings (P/E) ratios have averaged 18.5 in months when the term premium was below 0.5, roughly the post-crisis average; in all other periods multiples were below 15.

MOVE hasn’t moved

The other key measure to watch is bond market volatility. Using the MOVE Index, a proxy for U.S. bond market volatility, we see a similar relationship. Low bond volatility has been associated with higher multiples. In months in which volatility has been below the already repressed post-crisis average, multiples on the S&P 500 were roughly 18, versus 16 when volatility was above average. While you’d expect multiples to be higher when the bond market is calm, the relationship was not nearly as strong in the pre-crisis world.

Why does this matter? It matters because negative term premiums and repressed volatility are unique features of the post-crisis environment. They are also both related to the Federal Reserve’s (Fed’s) ultra-accommodative monetary policy. As the Fed removes monetary accommodation, it is unclear if these conditions are sustainable.

Common sense would suggest that just as building up the Fed’s balance sheet compressed the term premium and suppressed volatility, the reversal should have the opposite effect. What is less certain is the magnitude. For now, investors seem to believe that any rebound in the term premium or volatility will be modest and slow. If that proves wrong, expect lower multiples and a less benign environment for stocks.

Russ Koesterich, CFA, is Portfolio Manager for BlackRock’s Global Allocation team and is a regular contributor to The Blog.

 

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

©2017 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

Understand the Risks of Bond Market Investing

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I have been going over some of the most common mistakes in bond investing and reminding investors not to forget the purpose of their fixed income investments. Building on that, today let us explore the curious blunder of investors making investments that don’t match their goals.

On the surface, this one sounds pretty silly. After all, if I have already figured out the role that I want bonds to play in my portfolio, can’t I just make an investment that aligns with that goal? The short answer is yes, but bond investing can be tricky. Sometimes the risks in the bond market are not well understood by investors. Other times investors lose sight of their goals as they begin to select their investments.

Reach (too hard) for income

In today’s low yield environment, some investors go off course because they’ve become too intently focused on reaching for income. With the 10-year Treasury yielding only 2.3% and yields in other asset classes low as well, there just isn’t a lot of income to be had (source: Bloomberg data as of 7/31/2017). To seek a yield of 4% or 5%, investors would have to consider the riskier parts of the market, like long-term corporate bonds, high yield and emerging markets. Yield is scarce, and can come with more risk than investors may realize.

Let’s imagine an investor, Billy, who is trying to preserve his principal with his fixed income portfolio. He has a one-year investment horizon, and then wants to use the money as a down payment for a house. His primary goal over the next year is to preserve his capital and it would be nice to receive a little income along the way. What kind of yield might Billy get from a 1-year Treasury bill? The 1-year Treasury bill is yielding 1.19%, which isn’t a lot. He may be tempted to take on more risk to get what is perceived as a more reasonable level of yield. Here are some options, ordered by yield potential:

Yield and risk at a glance

Bond Yield Risk

Seeking a 2% yield? Billy could consider a 6-year Treasury note. 3%? Even a 30-year Treasury Bond is only yielding 2.90%, which means he would need to consider corporate bonds. 4% or more? Billy would have to look to riskier sectors of the market like long maturity bonds, emerging market debt or high yield, and they do not fit with his primary goal of capital preservation.

To help investors think about the risk of each investment, I added a couple of columns to the table above. As we have discussed before, the two most common risks in fixed income are interest rate risk and credit risk, which each investment is exposed to at different levels. Moving to longer maturity Treasuries may offer more yield potential than a 1-year Treasury, but it also means taking on more and more interest rate risk as you move out the curve. We see the same thing with credit risk; higher levels of risk offer higher levels of yield potential.

The combination of a one-year time horizon and the goal of principal protection does not leave much room for Billy to take on interest rate or credit risk. Staying in T-bills, a generally low risk money market vehicle, or a short duration fund might make sense.

Not as diversified as you think

Let’s look at another hypothetical example: Betty has diversification as a goal for her fixed income investment, and wouldn’t mind some income along the way. If you remember my last post, the income and diversification objectives pair well together. There are many investments to choose from—intermediate and long-term Treasuries, or investment grade and longer maturity corporate bonds—to help meet both goals.

But again, what if Betty still wants more yield and is tempted by the high yield market? It does offer a medium level of interest rate risk, which is consistent with the diversification objective. The problem? Credit risk has been positively correlated with the equity market. Adding too much credit risk to a portfolio could undermine the goal of diversification. In fact, the correlation between the equity (represented by the S&P 500) and high yield (represented by Bloomberg Barclays High Yield Index) markets over the past 10 years is 0.73, which points to a strong relationship (source: Bloomberg data as of 7/31/2017). Put simply, high yield bonds might not provide sufficient diversification against equity market risk. Betty may want to consider investments that have medium to high levels of interest rate risk, and low to medium levels of credit risk.

Picking the bonds that align with your investment objectives can indeed be harder than it seems. I hope calling out some of these potential pitfalls will make it easier for investors to remember their goals and focus on the right investments. Next time, I will talk about another often seen misstep, abandoning bonds when interest rates go up—and the puzzling mystery of why the rise might actually be good for bond investors.

Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog.

 

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.

Diversification and asset allocation may not protect against market risk or loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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.

This post contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

©2017 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

 

 

The Yield “Melt-Up” That Wasn’t

A partially melted red popsicle on a blue background

The second half of 2016 witnessed the rise of the “reflation trade”, a trend that accelerated after the U.S. election. The thesis: The global economy was finally breaking out, inflation was firming and bond yields would be rising as bonds are sold. While parts of this trade remain in place, other manifestations have reversed, including bond yields. After today’s turmoil, U.S. 10-Year Treasury yields are currently around 2.21%, below where they started the year.

What happened to the bond market meltdown and the thesis of rising rates?

Growth has yet to break out

By now everyone is aware of another disappointing first quarter for the U.S. economy. In part, a weak Q1 can be attributed to lingering seasonal quirks in the data. Still, the simple truth is that there is not much evidence that the economy is surging. Yes, job growth remains strong and consumers and small businesses optimistic. However, outside of the labor market actual economic activity remains modest. Adjusted retail sales are growing at roughly 4.5% year-over-year, in-line with the post-crisis average. While investment activity improved in Q1 and manufacturing is crawling back from its recession, industrial production remains muted. Finally, economic data are not keeping up with lofty expectations. The U.S. Citigroup Economic Surprise Index, which measures how actual economic data releases compare to expectations, is back into negative territory and at its worst level since October.

Economic Surprise Index

Inflation and inflation expectations remain modest

The funny thing about the reflation trade is we’ve yet to experience the inflation. In fact, realized inflation is decelerating: Core consumer prices, excluding food and energy, are down to 1.9% year-over-year, the slowest rate since late 2015. The Federal Reserve’s (Fed’s) preferred measure of inflation, core personal consumption expenditure (PCE), is at a one-year low of 1.60%. Crude oil prices, a big driver of short-term inflation, are below year ago levels as U.S. shale producers make up the supply OPEC has removed. The net result: 10-year TIPS inflation expectations have slipped to 1.90%, close to where they were in the immediate aftermath of the election.

Yields remain lower just about everywhere else

While U.S. investors, particularly those dependent on income, bemoan the lack of yield, pity the investor in Europe or Japan. German 10-year yields are still below 0.50%, while similar maturities in Japan and Switzerland yield 0.03% and -0.09% respectively. With the exception of Australia and New Zealand, the U.S. has just about the highest long-term rates in the developed world. For many foreign investors, the U.S. remains an attractive place to invest, keeping bond prices high and yields suppressed.

I still believe yields will creep higher this year. The Fed is likely to continue to lift short-term rates while increasing tightness in labor markets should nudge wages higher. That said, it is not obvious that the secular factors that have been suppressing bond yields—slow nominal gross domestic product, demographics, regulatory pressure and even lower yields outside the United States—allow for a melt-up in rates. When we look back on 2017, we may very well see another year in which rates defied expectations.

Russ Koesterich, CFA, is Portfolio Manager for BlackRock’s Global Allocation team and is a regular contributor to The Blog.

 

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of May 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results.

BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

©2017 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

3 Ways to Not Be Stupid with Your Bond Portfolio

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It may be early in the new year, but it’s never too early to talk about mistakes. I know, I know, there has hardly been time to make any in 2017… yet. But I am not talking about breaking that resolution to not eat sugar, or binge fewer TV shows. I am talking about common investment mistakes people make in their portfolios.

When I talk to investors, both professionals as well as those who work outside finance, three mistakes seem to come up again and again when it comes to how bond portfolios are managed. Now I know what you are thinking: Matt, most people don’t go around talking about their bond portfolios. That’s true. But when I hear people talk about investing in general, I often hear at least one of these behavioral mistakes mentioned.

Mistake 1: Forgetting what your fixed income investment is for.

When you buy a bond or a bond fund, you need to answer a simple question: What role does fixed income play in your portfolio? The typical answers are: a) diversify equity risk, b) pursue income, or c) help protect principal. And, many investors look to their bonds to do more than one of these things. The right answer can vary depending on your age, income needs, risk tolerance, and a host of other factors. No matter what the answer is for you, stick to it. Don’t be tempted by the latest hot investment trend or what your neighbor is investing in. Stay the course; invest in a way that matches your investment goals.

One important caveat: In today’s market it can be difficult for your bonds to achieve any one of those goals above, let alone all three at once. The 10-year Treasury note is currently yielding 2.45% (as of 1/31/2017, source: Bloomberg), and while it provides diversification against equities, that’s not a lot of income. You can get over 5% on some high yield investments, but you may sacrifice some portfolio diversification and take on more return volatility. This was not always the case. Think back to 2006 when the federal funds target rate was at 5.25%. Back then a 3-month Treasury bill yielded 5% (source: Bloomberg). That’s income and low volatility. Today’s market doesn’t offer the same opportunities. So be precise with what you want your fixed income investment to do. Hold realistic expectations, and stick with your goal. Which brings me to….

Mistake 2: Making investments that don’t match your goals.

This may sound simple, but you would be amazed at how often people get this wrong. Let’s say, you are in retirement and have managed to build a nice nest egg. You want your bonds to help protect your principal, maybe provide a little income but mainly not lose much value. If that is your goal, emerging market (EM) debt may not be the right place to put a big chunk of your money. EM debt can be a great source of income potential in a diversified portfolio, but not when you are looking for low volatility. A short duration bond fund may be a better option.

A good way to avoid making this mistake is to pause after you have built your portfolio. Before you invest it, take another look and ask yourself a few questions: Did the investments you ended up selecting match your investment goals? Do they fit together well in the portfolio? This is a simple but invaluable step to make sure you stay on target with your goals.

Mistake 3: Abandoning bonds when interest rates rise.

Too often investors are tempted to act if their investments are falling in price. And typically when interest rates rise, prices of bonds and bond funds fall. The temptation to jump ship can be especially strong with exchanged traded funds (ETFs) because you can watch prices intraday, just like a stock. If this is your tendency, I would suggest you think about your long term goals when you check your portfolio. ETFs provide transparency and trading freedom, but that doesn’t mean you should trade and rebalance more frequently. Don’t let the availability of information distract you and steer you away from your plan.

And most importantly for your bond ETFs, know that rising interest rates may actually be good for long-term investors. You are probably thinking: Wait, what? How can that be if rising interest rates cause the prices of bonds to fall? Turns out this is how bond math works. When interest rates rise, the price of your fund at first drops. But then the fund begins to reinvest cash flows at the new higher yields, which would steadily boost income. Over time, this increased income can potentially offset the initial price decline. An intermediate fund with a duration of five years may recover price loss from rising interest rates in about five years. And after five years the fund may continue to be investing at higher yield levels, potentially resulting in higher returns. So if you are a long-term investor, you may actually want interest rates to rise.

That is all for today. In future posts I will dive deeper into each of the three mistakes and provide more detail on how to help avoid them. Until then, stay off the couch and stay off the sugar.

Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog.

In today’s environment, consistent investment performance and low fees are critical to achieving your goals. Click here to learn more.

 

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. Diversification and asset allocation may not protect against market risk or loss of principal. There is no guarantee that any fund will pay dividends.

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.

This document contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

©2017 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

Why Reflation Has Room to Run

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The recent jump in global bond yields represents a reflationary reawakening just a year after deflation and recession fears were dominant. Is this another false dawn? We don’t think so. This is an important psychological shift for investors previously obsessing over downside risks to growth and inflation, typified then by the talk of “secular stagnation” and “liquidity traps.”

The latest trend started in July when bond yields bottomed at record lows. Signs of a global growth pickup stoked the more confident mood, as did Donald Trump’s surprise U.S. presidential victory. We believe this reflationary phase, which central banks have been trying to achieve with years of ultra-easy monetary policy, has further to run.

Wage growth, long missing in the post-crisis expansion, is a crucial part of the reflationary dynamic, as we write in our new Global Macro Outlook Waking up to reflation. U.S. wage gains are feeding higher inflation and solid consumer spending, supporting profits in the face of rising labor costs. We believe companies have scope to tolerate even higher wage inflation in a stronger growth environment, either by hiking product prices or through a modest decrease in profit margins. Our analysis shows that profits can improve even with rising wages—indeed, this is a hallmark of reflationary economic phases.

Labor vs Capital

Wages and profits can, and typically do, rise together during the reflationary phase of economic expansions. In the U.S., this was the case in the late 1980s, late 1990s and the mid-2000s. The key ingredient? Solid and rising aggregate demand.

The lack of stronger wage growth was a root cause behind fears of the U.S. economy’s fragility and the downside risks to inflation. Thus, it would be misleading to think that rising wages have a direct link with subsequent economic downturns. Economic cycles do not die of old age, as the Federal Reserve has repeatedly noted. In this case, we see no reason to believe that the seeds of reflation will sow the expansion’s demise just now. Most recessions can be explained by a sudden hit to aggregate demand, either due to some external, financial or policy-related shock.

This U.S. profit-wages dynamic has the potential to broaden and go more global. Any uptick in U.S. capital investment or productivity kick would give companies even more flexibility to lift wages. Elsewhere, this virtuous cycle is starting to take shape. In Europe, the slack created by the 2007-08 and 2011-12 crises is slowly being taken out. Labor market reforms have expanded the workforce in Japan, helping explain why wage growth remains limited even with the country’s unemployment rate at three-decade lows. A better synchronized global recovery would make this bout of reflation more powerful.

Global structural challenges do remain, particularly the record debt levels across the world. Combined with low growth and aging population, this is likely to hold down long-term bond yields in Europe and Japan. With financial markets much more tightly integrated globally, these external forces should limit how high U.S. yields can rise. And even in the U.S., where household debt levels have been reduced, leverage remains higher than at the start of previous tightening cycle. This implies any given increase in policy interest rates is likely to have a bigger economic impact than was the case pre-crisis.

There are risks to our outlook. U.S. President Donald Trump has raised hopes for looser fiscal stimulus, but the makeup of any changes is key. His approach to trade and foreign policy could present risks. Unexpectedly rapid U.S. dollar appreciation could cause emerging-market instability with global spillovers.

But we believe a moderate rise in the dollar is more likely, and the support for profit margins from better wages, spending and nominal growth reinforces our broadly positive view on risk assets and equities in particular. This has been far from a typical recovery: Healing the post-crisis economic wounds has meant U.S. businesses and consumers took longer to regain confidence and animal spirits. These now seem to be revving up.

The revival of animal spirits may start to drive more investors out the risk spectrum, reinforcing our expectation that there’s potential for a risk appetite recovery. Finally, modestly higher bond yields support our view that the rotation into value and momentum shares away from low-volatility equities likely isn’t over. Read more market insights in my full Global Macro Outlook.

Jean Boivin, PhD, is head of economic and markets research at the BlackRock Investment Institute. He is a regular contributor to The Blog.

 

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

©2017 BlackRock, Inc. All rights reserved. BLACKROCK is the registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

5 Big Things to Know About the Bond Market in 2017

High Angle View Of Red Number 5 On Walkway

Welcome to 2017! It is time to take a look into the crystal ball and try to figure out what the bond market has in store for us this year. Here are the five big things you should keep in mind.

1. Interest rates will likely continue to go up, but don’t panic.

The Federal Reserve (Fed) raised interest rates this past December, and more increases are likely on the way. The futures markets currently predict two more Fed rate hikes this year (source: Bloomberg). Increased inflation and higher longer term interest rates are also expected at the same time. But remember, we live in a global world and interest rates remain low in most large developed bond markets including Japan, Germany and the UK. Higher U.S. interest rates will likely attract foreign investors, which would push U.S. bond prices up, and yields down. The net will be higher U.S. rates, but not exorbitantly higher than where they are today. The U.S. 10-year Treasury yield may approach 3%, but it shouldn’t be anywhere near 5%. And, although higher yields result in declining bond prices, they can lead to higher income in the longer term.

2. The uncertainty of uncertainty is on the rise.

Right now both the bond and stock markets are reflecting low levels of volatility. This is surprising given that there is a new administration about to take office. Markets appear to be pricing in a lot of anticipated positives from policies that have yet to materialize, but we all know politics can be messy. Even if things turn out as good as they promise, the ride along the way will probably be bumpy. Higher volatility is likely across financial markets, especially in the first and second quarters as new policies and their implementation come into focus.

3. Inflation is finally moving up.

Despite years of strong job growth, it has not translated into higher prices in the form of inflation. But this trend is beginning to change: As of 10 January, the expected 10-year inflation rate rose to 1.98% (source: Bloomberg data). This may not seem very high, but prior to this past November we hadn’t seen the 10-year rate above 2% since September 2014. Inflation has been boosted by the stabilization of energy prices, consecutive years of 2% (and above) real gross domestic product (GDP) growth and the continued rise of wage inflation. According to the last payroll report, average hourly earnings were up 2.9% year over year. Higher inflation will put additional pressure on bond yields, and could also push the Fed to raise rates more quickly.

4. Don’t forget about municipal bonds, despite the likely headlines.

Muni bonds had a tough time in the fourth quarter of 2016 as rising interest rates and expectations of lower income taxes discouraged some investors. Looking ahead, we may see rising yields along with a continued focus from the government on tax reform, and such a move could hurt the relative attractiveness of muni bonds. That said, the asset class remains a good source of income potential for taxable investors. 10-year AA muni bonds offer yields above those of U.S. Treasuries, even before accounting for their tax advantage (source: Bloomberg). The asset class will likely be subject to its share of market volatility this year, but for taxable, income seeking investors, don’t snub muni bonds.

5. 2017 will be about yield, not price return.

Given the low level of yields as we enter the year—and the expectation that they will rise—many fixed income asset classes are unlikely to deliver strong total returns. It’d be hard for any fixed income asset class to match the 2016 performance of the Markit iBoxx USD Liquid High Yield Index, which returned 15.31% (source: Bloomberg). Investors should think about bonds as a potential source of yield and income, but probably not as a strong source of total return.

So where does that leave us?

As always, I urge investors to think hard about what role they want bonds to play in their portfolio—be it to mitigate stock volatility, diversify a portfolio or offer steady income potential—and make sure that their investment matches that goal. We may be in for a bumpy ride, and it is time to make sure that everything is in order before takeoff.

Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog.

 

Index returns are for illustrative purposes only. Index performance returns do 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.

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. Diversification and asset allocation may not protect against market risk or loss of principal.

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.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

©2017 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

Weather Forecast, Near 100% Chance of a Rate Hike

Austria, Tyrol, Tannheimer Tal, hiking trail in mountainscape

This week the U.S. Federal Open Market Committee (FOMC) will hold its last meeting of the year. And this time it appears likely that it plans to do something it hasn’t done yet in 2016: raise short-term interest rates. According to Bloomberg, the market is currently pricing in a 100% chance that the Federal Reserve (Fed) will raise rates from the current 0.50%-0.75% range to 0.75%-1.00%. The market’s confidence is driven by recent strong economic data. Job gains have been steady and the unemployment rate has fallen to 4.6%, at the same time the Consumer Price Index (CPI) rate is inching closer to 2% after having spent much of 2015 close to 0% (source: Bureau of Labor Statistics). And overall gross domestic product (GDP) grew a robust 3.2% in the third quarter (source: Bureau of Economic Analysis). All of this looks to have given the Fed confidence that it can go ahead and increase short-term rates, and it has clearly communicated this intention out to the market.

What does a rate hike mean to investors?

This potential increase in short-term interest rates probably won’t have much of an impact on most fixed income portfolios. The forecasted move itself is small, and it mostly affects shorter maturity bonds that do not have as much interest rate sensitivity as longer maturity bonds.

Outside the bond market, there will be slightly higher interest rates for some consumer loans like home equity lines of credit and adjustable-rate mortgages. In return we may see slightly higher interest rates on checking and savings accounts. All in all, we believe the impact for investors should not be significant.

Interestingly, if we look at the capital flows for U.S. fixed income exchange-traded funds (ETFs) in the accompanying chart, there has been quite a bit of activity since the last Fed meeting on November 2.

fi-etf-flows

Although some of the flow activity may be related to the Fed moving closer to raising rates, most of it has occurred since the U.S. election. The new administration has signaled policies such as tax cuts, increased Treasury issuance and reduced regulation that many investors believe could result in higher interest rates, higher inflation and a favorable environment for corporate bonds. Consequently we have seen 10-year Treasury yields rise sharply from 1.86% on November 8 to 2.41% on December 8 (source: Bloomberg data).

Flows since the election have reflected such sentiment. As Treasury rates have risen, investors have pulled back from Treasury securities. At the same time some have moved into TIPs on the expectation of higher inflation. And high yield inflows have been strong on the belief that that sector will continue to perform well. Like EM equities, EM bonds have experienced outflows and poor performance due to concerns about the impact of potentially new U.S. trade policies on emerging economies.

Where should investors go from here?

Investors with shorter-term investment horizons should be cognizant of the impact that rising interest rates have had on their bond portfolios, and be ready for more volatility as the new administration’s policies are implemented beginning in January. But longer-term investors may be best served by sitting tight. Yes, rising interest rates do cause bond prices to fall, and this drags down performance in the short term. Over the long run, however, higher interest rates boost bond fund income payments. Although this may sound counterintuitive, if you are a long-term bond investor, you may actually favor rising interest rates. Higher interest payments may offset the price decline caused by rising rates over time.

Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog.

 

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.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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.

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.

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.

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. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

©2016 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

The Persistence of Low Bond Yields

10Y US Treasury Yield 3-16

As the Federal Reserve prepared to raise interest rates last year, fears were rampant that rising interest rates would hurt bond investments by driving up bond yields (bond prices and bond yields move in opposite directions). Yet bond yields have actually declined since the Fed took action in December. Even after a recent uptick amid receding fears of a global recession the yield on 10-year treasury bonds is below 2%, a very low level by historical standards. Should investors still be concerned about rising bond yields?

There’s no immutable law of economics saying that bond yields have to rise back to what historically have been more “normal” levels. The yield on 10-year Japanese government bonds has been below 2% since the late 1990’s, and it’s now below 0% (that’s not a typo; it’s actually negative). Some of the factors that have contributed to these persistent low yields, such as Japan’s aging population, are starting to affect the US and other countries as well.

That doesn’t mean perpetual low bond yields are a certainty. Faster economic growth or a higher inflation rate could push bond yields up, and there are some signs that these trends could be starting to develop. The US economy has added an average of more than 250,000 jobs per month over the past 5 months, and there have recently been indications that inflation, long dormant, may be starting to come back to life.

But even if bond yields do rise from their current levels, they’re unlikely to soar. The global economy is still weak, and the inflation rate, though rising, is still well below the Fed’s 2% target. Furthermore the downward pressure on bond yields from the aging population is likely to continue. Yields may be very low by historical standards, don’t be shocked if they stay that way a while longer.

4 Simple Actions to Consider After Fed Liftoff

Eagle

We finally have liftoff. This week, after months of anticipation, the Federal Reserve (Fed) initiated its first rate hike in nearly a decade, raising the Fed Funds Rate by 25 basis points (bps).

Why not a bigger blast off? The Fed has made it clear that rate “normalization” will happen gradually, meaning rates will likely remain below historical averages for the foreseeable future. But while it may take years to get back to a 4 to 5 percent Fed Funds rate, higher rates are on their way.

The good news for investors is that just a few simple actions can help you prepare your bond and equity portfolios for this new rising rate environment. In the wake of the Fed’s decision, here are four such moves you may want to consider.

1. Consider Your Duration

While longer-duration bonds can provide portfolio diversification benefits, shortening the duration of your bond portfolio can potentially help manage losses due to rising interest rates.

Remember, duration is a measure of a bond’s sensitivity to interest rate changes. The longer the duration, the more a bond’s price is impacted. When interest rates change, a bond’s price will change in the opposite direction by a corresponding amount. For example, if a bond’s duration is 5 years and interest rates rise 1 percent, you can expect the bond’s price to fall by approximately 5 percent. Therefore, bonds with higher duration generally have greater price volatility and the potential for losses when rates rise.

2. Focus on Credit

Instead of owning only Treasuries, you may want to focus on adding credit exposure. Credit exposure adds credit risk (the risk that the issuer won’t pay you back) to a portfolio, but it mitigates some interest rate risk. In addition, investors are compensated for taking more credit risk with higher yields, so increasing exposure to higher quality credit risk may enhance income and offset potential price declines due to rising rates.

3. Shift to Cyclical Sectors

It’s important to remember that when rates rise, it’s not just bonds that are affected. Equities are affected too. Higher rates mean that borrowing money becomes more expensive, so it’s harder for businesses and consumers to finance everyday needs. As such, traditionally defensive sectors, like utilities and telecommunications, typically become increasingly vulnerable in a rising rate environment due to their existing large debt positions. At the same time, higher rates generally are a sign of an improving economy, boosting the case for adding exposure to cyclical sectors, which have tended to outperform when the economy is strong.

I prefer to get cyclical exposure through two sectors: U.S. technology and U.S. financials (excluding rate-sensitive REITs). With their large cash reserves, U.S. mature tech companies are much less vulnerable to rising rates than companies in more debt-laden sectors mentioned above. In addition, tech sector revenues may increase if economic growth continues to expand and consumers and businesses spend more. Meanwhile, for some financial institutions, like banks, rising rates could mean higher profits, as net interest margins may increase.

4. Seek New Sources of Income

You may also want to take a look at your dividend strategies when interest rates rise. Although traditional high dividend payers (think the utilities and telecom sectors) have performed strongly in recent years, they’ve become quite expensive by most valuation metrics. And the previously low interest rate environment paved the way for many of these defensive businesses to load up on debt to expand their operations, while continuing to pay high dividends to investors. As such, many of these companies will likely come under pressure when rates rise.

In contrast, dividend growth stocks have historically demonstrated less interest rate sensitivity and may be an attractive way to maintain yield in a rising rate environment. In contrast to high dividend payers, they tend to be more reasonably valued and have more potential to sustainably grow dividends over time.

So, although rates are expected to moderately increase, you can prepare your portfolio now for a rising rate environment by considering simple actions such as these. These simple steps may help to insulate your investments while also capturing new opportunities. Learn more about these four strategies for rising rates, and the exchange traded funds (ETFs) that can help you put them into action, at iShares.com/iThinking.

Funds, such as the iShares Floating Rate Bond ETF (FLOT), the iShares Short Maturity Bond ETF (NEAR) and the iShares 1-3 Year Credit Bond ETF (CSJ), can provide credit exposure with short duration. Meanwhile, the iShares U.S. Technology ETF (IYW), the iShares U.S. Financial Services ETF (IYG) and the iShares Core Dividend Growth ETF (DGRO), can provide exposure to the U.S. technology sector, the U.S. financials ex-REITs sector and dividend growers, respectively.

Heidi Richardson is a Global Investment Strategist at BlackRock. She is also Head of Investment Strategy for U.S. iShares.

 

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. 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 Fund’s income may decline when interest rates fall because most of the debt instruments held by the Fund will have floating or variable rates.

NEAR is an actively managed fund and does not seek to replicate the performance of a specified index. Actively managed funds may have higher portfolio turnover than index 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 and than the general securities market. Technology companies may be subject to severe competition and product obsolescence.

There is no guarantee that any fund will pay dividends.

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.

This document contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

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. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision. BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

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

©2015 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.

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