Fixed Income, continued

The Fed, acknowledging that the economy remains weak, signaled its intention to push forward with its plans to purchase U.S. Treasury and mortgage-backed securities in an attempt to pump capital into the system and keep a lid on longer-term interest rates. Simultaneously, the Federal Open Market Committee reiterated that it would be keeping the Federal Funds rate near 0% for an extended period. Meanwhile, interest rates climbed to the highest levels this year with the 10-year U.S. Treasury hitting 3.1% at month-end. While short-term rates remained anchored at levels under 1%, longer term rates edged up. The 30-year U.S. Treasury yield rose nearly 50 basis points to close the month at 4.0%, a level not seen since November 2008. As a result, the long duration Treasury iShares funds were the worst performers in April.

Outside of the U.S. Treasury sectors, both investment grade and high yield enjoyed their best month ever in terms of performance versus U.S. Treasuries. Investment grade credit spreads tightened 87 basis points in April, producing 460 basis points of excess return as measured by the Barclays Capital Investment Grade Credit Index. The Barclays Capital High Yield Index spread compressed 295 basis points and delivered a lofty 12.1% total return in April, generating excess returns of 13.2% and bringing year-to-date excess returns to 20.3%. Lower quality issues outpaced higher quality securities in both the investment grade and high yield markets. As a result, the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) was the top performing iShares fixed income fund in April. (For standardized returns, please see page 5 of this report. Certain sectors and markets may perform exceptionally well based on current market conditions and iShares funds can benefit from that performance. Achieving such exceptional returns involves the risk of volatility and investors should not expect that such results will be repeated.)

A Look at ... "The Future of ETFs in 401(k)s"

The defined contribution (DC) retirement plan as we know it could soon be set for a major change. Not only have many workers suffered major losses within their 401(k) plans, many employers have stopped contributing to their employees' plans, creating a bleak outlook for the future of working America.

The driving force behind changing 401(k) plans is securing the retirement income of future retirees. As recent news has shown, many Americans are having to delay or call off their plans for retirement as a result of the loss or sharp decrease in the assets in their 401(k)s. Future retirees are longing for the safety of old-fashioned defined benefit (DB) pensions plans -yet the fallout of these benefits and plans was the catalyst for the creation of the 401(k).

One solution to this national problem may be the use of ETFs in 401(k) plans. ETFs offer low costs, transparency and flexibility. Some companies have begun to switch their retirement plans to ETF platforms. This system represents a big change for retirement markets. In the past, people in 401(k) plans could only invest indirectly in ETFs, typically through third-party unitized funds or collective trusts. With this new platform, participants can create their own portfolios and freely transact using ETFs, which trade throughout the day.

The need for 401(k) reform has also been echoed by many consultants, financial advisors and companies, whose interest is more unique and specific - they're interested in adding ETF options for alternative asset classes to target date retirement funds, while micro-and small-sized plans interest is very broad in terms of type and number of ETFs.²

Since many smaller companies are new to the 401(k) process, the bulk of growth in retirement plan assets is expected to be driven by those size firms according to Barclays Global Investors. At this point, penetration by ETFs into the 401(k) is less than 5%, but as a result, iShares is expecting to see a period of strong growth for ETFs in retirement plans in the next several years.²

To help address the need for more information regarding ETFs in 401(k)s, iShares recently launched a new program that identifies administrative providers and networks that offer competitively priced and straightforward access to ETFs in 401(k) accounts. This makes it easier for financial advisors to provide ETFs in clients' retirement programs alongside traditional mutual funds.

Endnotes

1. Source: Bloomberg News
2. Source: Wojnar, Darek. Head of iShares' Product Research and Strategy Group, Barclays Global Investors

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