ETFs and LDI

How to find the perfect match.

November 26, 2013

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story_images_mismatched-shoesIt seems as if we’ve been talking about liability-driven investing (LDI) for years. It makes sense intuitively—after all, the whole pension promise can be tied back to one basic goal: making sure your assets match up with your liabilities. Simple, right? Well, not so much. The big barrier for plan sponsors seeking to streamline their investments along liability-based lines has been poor bond performance. Low yields make it next to impossible for plans to use bonds as matching assets and still generate much-needed returns.

It’s no secret that Canadian plans have been turning to other kinds of assets to find the perfect match for their liabilities, with real estate, private equity and infrastructure gaining traction in this market. In the end, plan sponsors have proven willing to trade off liquidity in exchange for a better fit with their long-term liabilities.

At the same time, pension funds are getting better at expanding their view on what bonds should look like in a portfolio, with high-yield debt and global bonds becoming a more acceptable way to go.

But what about exchange-traded funds and LDI? According to this article on, bond ETFs are also a viable option for constructing LDI portfolios. The article references BlackRock, which launched a suite of iShares bond ETFs built on a diversified pool of investment-grade corporate credit with a defined maturity date. While iShares notes the most interest has come from investment advisors and insurers, the ETFs could be compelling for pension investors looking for flexibility on the duration front. The iShares product’s duration decreases gradually to zero and performs like an individual bond, which is a handy feature for plan sponsors because it addresses a top concern—interest rate risk.

As more providers seek to gain traction in the pension investment arena, bond ETFs such as these could be a smart way to go, especially as more and more plan sponsors seek better and easier ways to make LDI a reality.

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