Navigate market volatility with active & flexible investing

• Staying focused on the structural drivers of the economy is key to investing in this environment of heightened market volatility.
• In a zoomed-out view, U.S. inflation has moderated but remains at relatively high levels, while the labor market currently appears solid and stable, underpinned by a services-oriented economy. This combination is likely to restrain the Federal Reserve from additional rate cuts in the near term.
• Policy changes pose risks to the macroeconomic backdrop, particularly on the growth side, but the opportunity to source income is ever-present, and can be done in an optimal and efficient manner through active and flexible investing.
• Actively managed exchange-traded funds (ETFs), such as the iShares Flexible Income Active ETF (BINC), may provide investors a way to source attractive income opportunities, while managing volatility and downside risks in the current environment.

This year has started with a barrage of dramatic and often contradictory headlines, throwing markets into a tailspin.¹ While being in tune with day-to-day news is important, being overly focused on the details in insolation risks missing the forest for the trees.

One of the most important skills in investing is determining what information is relevant and what is just noise. Zooming out to see the big picture, two things are clear: inflation has moderated impressively, but remains above the Fed’s 2% target, and the labor market has found a steady balance, while avoiding job destruction.²

On inflation, the data came in higher-than-expected to start the year, but a zoomed-out view shows there is clear seasonality at play; January inflation tends to be the hottest month³ for the core personal consumption expenditures index, the Fed’s preferred inflation gauge. So, while we expect some moderation in the inflation data as the strong seasonality wanes, we can also see that inflation is still simply too sticky high above the Fed’s 2% target, with risks to stay at these levels amidst evolving trade policy.

Shifting to the big picture on growth, the modern U.S. economy has been extraordinarily stable. We believe the primarily services-oriented, asset-light, and less interest-rate sensitive economy is the linchpin that drives American exceptionalism. This remains a core structural feature for contextualizing recent shifts in the data, which look to be softer on the margin but moderating from healthy levels.

However, one topic with near-daily news where we do see that more caution is warranted is trade policy. The net effect on growth from trade policy is a big question mark and the range of outcomes is still wide. In the short-term, we have seen numerous companies cite uncertainty around tariffs as a reason for delaying hiring or capital expenditures. (Learn more about The Potential Portfolio Impact of Trump Policies & Tariffs.)

Extended uncertainty and potentially higher input costs can be a drag on corporate earnings. This is a risk that warrants watching with a close eye. Longer-term, it’s important to understand the different global economies and the channels of trade associated with those economies. The U.S. is the world’s largest importer⁴, but it is also the most self-sufficient when it comes to trade as a driver of economic growth. This dynamic could help keep U.S. growth remain relatively well-insulated while the final state of tariffs continues to be negotiated.

In sum, a moderating but above-target inflation level means the Fed may move slowly from here in terms of additional rate cuts, while stable employment affords them some luxury of doing so for the time-being. Keeping an eye on the evolving risks while investing to the structural trends is key to generating durable returns in an environment with heightened uncertainty.

While we wait and see how a number of these factors play out, we maintain that investing in fixed income is all about income, income, income!

Inflation has come a long way down from its peak of 9.1% in June 2022 but is showing stickiness in the last mile.⁵ This has created a dynamic where central banks need to keep rates “higher for longer”, making the real — or inflation-adjusted — rate of return available abnormally high. We believe the potential to lock in yields in high-quality, short-to-intermediate term bonds with less duration risk and less volatility is a once-in-a-generation opportunity.

The fixed income universe is vast, complex, and continuously evolving, consisting of at least 20 distinct asset classes and over 70,000 securities.⁶ Actively utilizing the full scope of the global fixed income universe can allow investors to optimize for yield, beta, liquidity, diversification, correlation metrics, etc. to build a more efficient income portfolio in today’s environment.

However, traditional fixed income indexes generally only hold three asset classes: government bonds, mortgage-backed securities, and investment grade credit. Market-cap weighting works well enough for an equity index because the most successful companies get the highest weighting. Cap weighting in fixed income indexes, like the Bloomberg U.S. Aggregate Bond Index, or the Bloomberg U.S. Universal Index, skews exposure towards the most indebted entities (i.e. the U.S. Treasury) and on inefficient parts of the yield curve. A tailored, active approach to investing can better optimize your fixed income allocation.

Launched in May 2023, the iShares Flexible Income Active ETF (BINC) seeks to offer investors efficient access to sectors of the fixed income market that are challenging to reach, including European credit, high yield, and securitized products.

BINC is actively managed by an experienced team led by Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income.

The fund focuses on utilizing “plus” fixed income sectors, beyond the traditional, well-known “core” markets, to seek income and manage risk through different market environments, which can make it complementary to core strategies. “Core” refers to the traditional fixed income asset classes with the highest credit quality, such as U.S. Treasuries, U.S. agency mortgages, and U.S. investment grade corporate debt. Conversely, "plus" refers to fixed income asset classes outside of the "core" universe, such as U.S. high yield corporate debt, securitized products, and global debt.

iShares active ETFs are powered by the size and scale of Blackrock — the world’s largest ETF provider⁷ and a global leader in active management.

The potential advantages of owning an active ETF come from leaving the selection and monitoring of individual securities to the management team. Here is a snapshot of how the BINC team views the current investing landscape:

• U.S. corporate bonds: Spreads vs. Treasuries are tight, meaning corporate credit does not offer much additional yield above government bonds of similar maturities. But there is still plenty of opportunity to source attractive all-in yields. With healthy fundamentals married to very little supply coming to market in this part of the curve, the opportunity to source yields above 5.5% is an attractive income expression for portfolios.
• Securitized Credit: Many parts of the securitized markets continue to trade at a premium to investment grade credit, meaning they offer additional yields above corporate bonds with similar maturities and credit ratings. Taking advantage of the pick-up in yield and spread for these assets with comparable risk profiles to Investment Grade credit can be a meaningful value add to portfolios today. (Also known as asset-backed securities, securitized credit refers to pools of debt bundled together and sold to investors. The types of loans can include loans to finance M&A, mortgages, auto loans, home equity loans, and credit card receivables.)
• High Yield Bonds: The high yield market has delivered some of the best risk-adjusted returns in the post-pandemic era. With healthy fundamentals, muted supply, and defaults trending downwards, we continue to be constructive on these parts of the universe, currently offering 7% yields, with the caveat that being selective with what you are owning here is especially important.
• European debt: After years of negative interest rates and negative yielding debt, we are now seeing attractive, positive yields attached to companies with solid fundamentals. In parts of 2019 — 2020 and all of 2021, the entire eurozone one-to-three-year investment grade credit market was negative yielding!⁸ Today, you can own these front-end assets at 5% yields, when hedged for foreign exchange rates.

A modern portfolio needs to be dynamic around a global economy undergoing significant change. Being able to precisely and actively manage all facets of your portfolio is key to building a truly durable, diversified, income-generating portfolio without taking on unnecessary volatility, interest rate risk, or concentration risk.

The iShares Flexible Income Active ETF (BINC) is designed to help you do just that and may be a useful tool to help you navigate this period of heighted market volatility.