In a recent episode of “Behind the Ticker,” Joanna Gallegos, co-founder of BondBloxx, shares her extensive background in ETFs and the innovative fixed income strategies her firm employs. Gallegos, who has been in the ETF industry her entire career, began at Barclays Global Investors during the early days of iShares before moving to JP Morgan to help start their ETF business. She co-founded BondBloxx in October 2021 with a team of experienced ETF professionals from firms like BlackRock, Vanguard, and JP Morgan, aiming to address the underdevelopment of fixed income products in the ETF market.
About Joanna Gallegos and BondBloxx
Gallegos explains that BondBloxx was created to bring more precision to fixed income investing through ETFs. The firm’s product line focuses on high-yield sector and credit rating ETFs, offering a range of tools that allow investors to tailor their exposure more precisely. The company identified a gap in the market for more specific fixed income products, particularly in the high-yield space, where traditional broad market exposures were no longer sufficient for the evolving financial landscape.
Investment Strategy and Approach
One of the standout products discussed is the BondBloxx CCC Rated US High Yield Corporate Bond ETF (ticker: XCCC). This ETF provides diversified exposure to over 220 bonds in the CCC rating category, which typically comprises about 10-11% of a broad high-yield index. Gallegos highlights that XCCC offers investors a significant yield pickup, with yields around 12%, and has shown impressive price appreciation in 2023. This ETF is designed to complement broad high-yield exposures by allowing investors to add a higher concentration of CCC-rated bonds, benefiting from their higher yields and potential price appreciation as interest rates decline.
Gallegos addresses common misconceptions about CCC-rated bonds, emphasizing that the current market fundamentals for high-yield bonds are strong, and the overall default rates are not above historical norms. She explains that the diversified nature of XCCC, with hundreds of bonds, mitigates individual default risks and offers a more stable investment compared to picking individual high-yield bonds. The ETF’s monthly rebalancing ensures it stays aligned with the ICE BofA CCC & Lower US High Yield Constrained Index, providing consistent exposure to the target credit rating.
Portfolio Construction and Implementation
For advisors and investors, Gallegos suggests that XCCC can be a valuable addition to an existing high-yield allocation, rather than a replacement. It allows investors to lean into the higher yield opportunities within the high-yield spectrum, especially in an environment where rates are expected to remain high for longer. This approach can enhance overall portfolio yield and performance, making XCCC a strategic tool for optimizing fixed income investments.
Deeper Dive: Insights from the Full Conversation
Beyond the headline strategy, the full conversation between Brad and Joanna Gallegos covered several additional themes worth highlighting for advisors and investors.
On Process and Philosophy
So you need to see more, but we don't foresee our recession coming. And the second thing is, again, going back to bond math and just giving some historical perspective on this, like the coupon income has been the primary driver of long-term returns in fixed income and specifically in high-yield. We have some data that shows that it really has driven and absorbed in volatility in the high-yield segment. So in particular, when you have a 12% million-long yield within the portfolio, it can, it can weather price volatility, very, very well.
In 2023, it was the top performing category. If they think of it, it returned over 20%. And, you know, it's hard for people to create a relative sense of what's different about junk bonds and I try not to use that word. Today versus what they knew and what they're associating, they're associating with, like, the floor dropping out and everything going away. That could happen if you build up really specific idiosyncratic risk and your portfolio with certain coupes and certain fundamentals, but in certain, you know, smaller size exposure to a triple seed.
Market Context and Positioning
And this just hadn't been updated yet. So in high yield, we brought forward two things. So we brought seven industry sector products in high yield. And then we did three credit rating products. And so trading through the credit spectrum in credit in general, but in high yield, specifically from WB all the way to triple C, is actually how institutional investors think about their portfolios and where their risk is. And so we wanted to put all of these tools.
And he called another co-founder at a bond block, his name's Brian O'Donnell and says, here we got to do this business. We've been talking about it at conferences over drinks for so long. But the way that markets are have been functioning and the role of ETFs specifically in fixed income is time. Like, do you want to do this? And so they made a couple more calls. And so there were seven of us that came together in October of 2021 to form a fixed income only ETF provider.
So if you're buying a high yield ETF today, and you're getting the beta index exposure to that, you're already exposed to about 10 percent triple Cs. And so what is interesting is, you know, for someone that's using that in their allocation today, this is a really great compliment to say, well, maybe, you know, you should be adding another slice of triple Cs adding more exposure into your broad based high yield exposure. The yield has been bouncing around 12 percent all year.
Key Takeaways
- The firm’s product line focuses on high-yield sector and credit rating ETFs, offering a range of tools that allow investors to tailor their exposure more precisely.
- This ETF provides diversified exposure to over 220 bonds in the CCC rating category, which typically comprises about 10-11% of a broad high-yield index.
- Gallegos highlights that XCCC offers investors a significant yield pickup, with yields around 12%, and has shown impressive price appreciation in 2023.
- This ETF is designed to complement broad high-yield exposures by allowing investors to add a higher concentration of CCC-rated bonds, benefiting from their higher yields and potential price appreciation as interest rates decline.
- She explains that the diversified nature of XCCC, with hundreds of bonds, mitigates individual default risks and offers a more stable investment compared to picking individual high-yield bonds.
- It allows investors to lean into the higher yield opportunities within the high-yield spectrum, especially in an environment where rates are expected to remain high for longer.
What This Means for Advisors
For financial advisors evaluating options for client portfolios, this conversation with Joanna Gallegos highlights important considerations around fixed income. Understanding the strategy behind each fund—not just the ticker—helps advisors make more informed allocation decisions and better communicate the rationale to clients.
The themes of fixed income and income investing discussed in this episode are particularly relevant in the current market environment, where advisors are increasingly looking for differentiated solutions that go beyond traditional benchmarks.
Listen to the Full Episode
This article is based on an episode of Behind the Ticker, hosted by Brad Roth, Founder and CIO of THOR Financial Technologies. For the full conversation with Joanna Gallegos, including additional nuances and details, listen on Spotify, Apple Podcasts, or watch on YouTube.