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Here’s how BlackRock’s Rick Rieder is navigating the bond market sell-off in his outperforming ETF

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BlackRock global fixed income CIO Rick Rieder said Friday that this year’s bond market volatility has created opportunities to buy high quality yields on the cheap. The result is his new fund outperforming some of the biggest bond ETFs during the most recent sell-off. The BlackRock Flexible Income ETF (BINC) , managed by Rieder, has dipped less than 1% on a total return basis over the past month even as interest rates have soared. That compares to a drop of 2.5% in the far larger iShares Core U.S. Aggregate Bond ETF (AGG) and 2.2% for the Vanguard Total Bond Market ETF (BND) , the two biggest bond ETFs. BINC 1M mountain BlackRock’s BINC has held up better than major bond ETFs over the past month. Rieder said his fund’s focus on shorter-term bonds has allowed it avoid some of the swings caused by the recent moves in interest rates, which have been more dramatic at the long end of the yield curve. “We’ve got an environment for fixed income where you can create a lot of yield, and you don’t have to get the yield the traditional ways that you use to. And you don’t have to extend your duration and go out the yield curve,” Rieder told CNBC. The fund has an effective duration of under three years, and the majority of its holdings mature in seven years or less. “I think what people underestimate is the long end of the bond market, the 30-year Treasury, is about the same volatility as the stock market,” he said. The portfolio Outside of cash, the fund’s top individual holdings include mortgage backed securities, the iShares iBoxx Investment Grade Corporate Bond Fund (LQD) and sovereign debt from Mexico and Brazil, according to BlackRock’s website . The mortgage market has seen a shift that lets the fund add highly-rated assets at a discount, Rieder said. “Normally, the buyers of mortgages are the banks, the Fed and Japan. And none of the three are buyers today, and at least two of the three are sellers. … So it has cheapened up agency mortgages, and it is a AAA asset that is extremely liquid,” Rieder said. Mortgage-backed securities, and many other bonds, can be difficult for investors to access individually, though there are index funds that track different segments of the market. The price of ETFs that track mortgage-backed securities from iShares ( MBB ) and Vanguard ( VMBS ) are each down more than 5% this year. Nearly 40% of BINC’s exposure is to assets outside the United States. Rieder said that the strong dollar has sometimes made it more attractive for a U.S.-based fund to shop overseas. “If you’re an international investor, the hedging costs are extremely expensive to buy dollar assets. But if you’re a dollar investor, you can buy things like European investment grade credit and you actually get a currency benefit,” Rieder said. BINC, which launched in May, has more than $150 million in assets under management. It has a 30-day SEC yield of 5.75%, an average yield to maturity of 7.31% and a net expense ratio of 0.40%. The fund pays distributions on monthly basis, and has a total return of 1% since it debuted.

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