Michigan Municipal Employees stocks up on BondBloxx ETFs, adding 9 in Q3

Anyone doubting that a firm whose exchange-traded funds are less than a year old could have 12 of them rank among a multibillion-dollar pension fund's holdings should check out the Municipal Employees' Retirement System of Michigan's latest 13F holdings report.

Twelve ETFs from BondBloxx Investment Management Corp., which launched its first ETFs in February, are listed among MERS' holdings for the quarter ended Sept. 30, according to the roughly $13 billion retirement system's most recent 13F, filed Nov. 14.

According to the 13F, the dollar value of MERS' investment across the 12 BondBloxx ETFs totaled about $400 million. That was up from three BondBloxx ETFs with assets totaling about $53 million as reflected in MERS' 13F report for the quarter ended June 30.

While BondBloxx is a new firm, it has "an extremely deep team" with decades of ETF industry experience, said Paul Van Gilder, a senior investment officer and portfolio manager at Lansing-based MERS.

Collectively, the BondBloxx team has experience working at a variety of major ETF issuers "where they launched hundreds of ETFs," Mr. Van Gilder said in an email. The team's "extensive industry experience," together with the transparency and liquidity of the ETF structure, "allowed MERS to become comfortable with BondBloxx as an investment manager," he said.

MERS continues to hold shares of the 12 BondBloxx ETFs and views them as "long-term holds," Mr. Van Gilder said in a follow-up interview.

"In addition to using ETFs to implement our asset allocation, we also use them to build active portfolios that seek to outperform their respective benchmarks in different asset classes, and that's really what makes us different," he said. "A lot of institutions will use ETFs to hold for a short period of time or just to make things a little bit more efficient, but we use models to build active portfolios out of ETFs."

About 42% of the pension fund's total assets are invested in ETFs, Mr. Van Gilder said.

In its fixed-income portfolio, MERS predominantly uses bond ETFs but also uses active managers in "inefficient" asset classes such as emerging markets debt, Mr. Van Gilder said in an email. The use of bond ETFs is "important in order to efficiently implement our asset allocation model," he said.

"In fixed income, this model actively allocates amongst sectors ... and the liquidity of the ETF structure allows MERS to efficiently rebalance this strategy with low trading costs," Mr. Van Gilder said.

The BondBloxx ETFs added during the quarter ended Sept. 30 included eight duration-specific U.S. Treasury ETFs, he said. BondBloxx launched those eight ETFs in September.

"We own those in our U.S. Treasury portfolio and … that Treasury portfolio actively manages interest rate duration," Mr. Van Gilder said. "And those new targeted BondBloxx ETFs allow us to target duration better in the portfolio than what's current available in the ETF market."

In addition to the BondBloxx U.S. Treasury-focused ETFs, MERS holds shares of three BondBloxx high-yield corporate bond ETFs. The most recent 13F also shows that it held 4.4 million shares of the BondBloxx JP Morgan USD Emerging Markets 1-10 Year Bond ETF. BondBloxx's website showed that as of Sept. 30 the emerging markets fund had 4.45 million shares outstanding and net assets totaling slightly more than $169 million.

The BondBloxx team saw a gap in the emerging market debt ETF product marketplace where a low-cost, shorter-duration emerging market sovereign debt ETF could be a valuable addition, Mr. Van Gilder said.

"MERS believed this product offered an attractive risk/return profile and would add value to our portfolio," he said.

MERS doesn't have any concerns about being the only shareholder in an ETF, Mr. Van Gilder said.

"One of the most important characteristics of an ETF is the ability to access liquidity of the underlying asset class via the create/redeem mechanism, meaning even ETFs with limited exchange trading volume can be extremely liquid as long as securities that make up the ETF are liquid," he said.

Bond markets are likely to be "quite a bit more volatile" over the next 10 years than they have been during the last 10, Mr. Van Gilder said, adding that "increased precision with a number of different ETF products will help investors manage their portfolios better."

BondBloxx, which has brought a variety of new products to market that offer precise exposure to different fixed-income sectors, is "slicing and dicing the fixed-income markets on a scale that we haven't seen yet from existing issuers," Mr. Van Gilder said.

Incorporated in 2021, Larkspur, Calif.-based BondBloxx was founded by ETF industry veterans Leland Clemons, Joanna Gallegos, Elya Schwartzman, Mark Miller, Brian O'Donnell and Tony Kelly, each of whom worked at BlackRock Inc. at some point in their careers, according to biographies available on the BondBloxx website.

"It's obviously a huge vote of confidence that we appreciate," Mr. Clemons said regarding MERS' decision to invest in the firm's ETFs. "Paul and his team are very forward-looking and have been great partners."

BondBloxx, which according to its website "is the first ETF issuer 100% focused on fixed income," currently offers 19 ETFs with assets totaling more than $500 million, he said.

In addition to those 19 ETFs, "you should expect that we will have more products coming in 2023 for sure," Mr. Clemons said.

"I can't say much more, but I would share that there are fixed-income asset classes within which more precision is clearly needed — large asset classes," he said.

The BondBloxx ETFs "have had a great first year with over $500 million in combined assets," said Todd Rosenbluth, New York-based head of research at VettaFi LLC, a data and analytics provider.

BondBloxx entered a "relatively crowded and relatively concentrated" ETF marketplace and found success by focusing on the fixed-income market and offering investors "a more focused slice" of traditionally broad investment styles, Mr. Rosenbluth said.

"Their largest product is XEMD, which is an emerging markets duration-focused ETF so you can actually target the interest rate sensitivity of the emerging market slice of the portfolio," Mr. Rosenbluth said, referring to the BondBloxx JP Morgan USD Emerging Markets 1-10 Year Bond ETF by its ticker symbol.

The emerging markets ETF in particular demonstrates BondBloxx's success in targeting the institutional marketplace, he said. While the fund has a "concentrated investor base," getting a single big investor like MERS on board has helped to get the product "on the radar for other investors," Mr. Rosenbluth said.

A way for new ETF market entrants like BondBloxx to garner attention is to offer a lower-cost alternative to more established products, Mr. Rosenbluth said, citing the BondBloxx BB Rated USD High Yield Corporate Bond ETF's 0.20% expense ratio as one example.

"Twenty basis points is relatively low for a high-yield bond ETF," he said.