#1Ell Global Research As of July, 2020 BlackRock. Pricing and Liquidity of Fixed Income ETFs in the Covid-19 Crisis of 2020 ICRMH0920U-1319728-1/13#2How Did Fixed Income ETFs Behave During the Covid-19 Crisis? Fixed income ETFs generally performed as expected and provided an alternate source of liquidity for challenged bond markets. We demonstrate this by evaluating the following dynamics: 1 2 Market participants turned to fixed income ETFs for price discovery. 3 Pricing - Fixed income ETFs reflected real-time value Liquidity - Fixed income ETFs were efficient to trade The Arbitrage Mechanism - performed as expected. BlackRock iShares iBoxx $ High Yield Corporate Bond ETF (HYG) secondary volume vs. Cboe Volatility Index Secondary Volume ($bn) 776 00 43 2 1 Jan 2019 Jan 2020 May 2019 Sep 2019 HYG secondary volume Source: BlackRock, Bloomberg (data as of March 24, 2020) VIX 90 80 70 60 50 40 30 20 10 0 ICRMH0920U-1319728-2/13 VIX Index#3Price Discovery: During the height of the volatility in March 2020, bond ETFs posted large price discounts from Net Asset Value (NAV). Are Large Premiums and Discounts to NAV Problematic? There is information value. Average Absolute Stated Premium / Discount to NAV TLT LQD HYG NO. BlackRock January- February 0.13% 0.13% 0.21% March- April 0.86% 1.39% 1.06% Source: BlackRock, based on data from Bloomberg as of 4/30/2020. Price ($) 105 100 95 90 85 80 75 70 65 Feb-19 A Window Into Real Time Pricing Prices of LQD vs. Top Holdings Feb-22 Feb-28 Feb-25 Mar-05 Mar-02 Mar-08 Mar-11 Mar-14 Mar-17 Mar-20 Mar-23 GE 4.125% 2035 CVS 4.3% 2028 VZ 4.329% 2028 Source: FINRA TRACE, Bloomberg. As of 3/23/2020. Holdings are subject to change. Holdings shown should not be deemed as a recommendation to buy or sell securities. For complete holdings, see www.ishares.com ABIBB 4.9% 2046 GS 6.75% 2037 LQD ICRMH0920U-1319728-3/13#4Price Discovery: Market Price vs. NAV? Deviation of Dealer Quotes to Actual Trade Price Standard Deviation in Price (HY) % of LQD Universe 45% 40% 35% 30% 25% 20% 15% 10% 2 Source: FINRA TRACE, Dealer quotations. 5% 1.6 0% 1.2 0.8 0.4 0 2-Jan-20 HY (Price Domain) 2-Feb-20 40% 0-5 times Trading activity in LQD universe, March 2020 33% My 6-10 times 2-Mar-20 50 11% 40 10-15 times 30 20 10 2-Apr-20 IG (Spread Domain) 0 Standard Deviation in Spread (IG) 16% 16+ times Source: FINRA TRACE, BlackRock from 3/2/2020 -3/20/2020. Includes only end investor buys and sells - not dealer-to-dealer trades. BlackRock What Causes Discounts on Bond ETFs vs. NAV? ( Fund NAV is calculated once per day using actual trades, dealer "runs", and estimation methods. Majority of bonds do not trade on a given day - NAV largely based on estimation. These dynamics are exacerbated during periods of volatility. The ETF price reflects an actionable trade on exchange. ICRMH0920U-1319728-4/13#5Price Discovery: Intraday Intrinsic Value? ● ● What Is Intraday Intrinsic Value? Bottoms-up, bond-by-bond valuation, calculated throughout the day. 12-factor intraday bond valuation model developed by BlackRock in 2015. Intrinsic Value Offers an Intraday Estimate of ETF Premium/ Discount On March 24th: HYG traded at 2.4% closing premium to NAV, but only a 0.4% average intraday premium to Intrinsic Value. BlackRock Price (USD) 88 85 82 79 76 73 70 67 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% flow at T (right axis) H iShares HYG ETF P/D to NAV at T-1 iShares IV 3/2 3/3 3/4 3/5 3/6 3/9 3/10 3/11 3/12 3/13 3/16 3/17 3/18 3/19 ETF Price W 3/20 3/23 3/24 3/25 iShares HYG ETF P/D to iShares IV NAV at T-1 1,200 3/26 3/27 3/30 3/31 As of 6/26/2020. Source: BlackRock, Bloomberg and Refinitiv. 3/5 3/6 3/9 3/10 주 3/11 3/12 3/13 3/16 3/17 3/18 3/19 3/20 3/23 3/24 3/25 3/26 3/27 3/30 3/31 900 600 ICRMH0920U-1319728-5/13 300 0 (300) ETF b/a spread (right axis) 16 14 12 10 (600) (900) W 8 6 + NO 2 Primary Market Activity (million USD) b/a Spread (bps)#6Price Discovery: The presence of lag effects in Net Asset Values Autocorrelation Function for LQD 1/2/20-4/30/20 1.0 8'0 0.6 0.4 0.2 -0.2 0.0 1.0 0 -0.2 0.0 0.2 0.4 0.6 0.8 Lag Autocorrelation Function for HYG 1/2/20-4/30/20 0 5 BlackRock 10 5 T 10 15 Lag 15 Source: BlackRock, based on daily NAV returns from Bloomberg Daily NAV-Based Returns Exhibit Positive Correlation to the Previous Day's NAV Return. Daily ETF Total Returns Have Tended To Be Uncorrelated To Past Returns. ICRMH0920U-1319728-6/13#7Price Discovery: Large Premiums/Discounts Do Not Persist ETF Price Reflects Real- Time, Actionable Value for Portfolio. BlackRock ETF Price - NAV 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% Bond ETF Prices and NAV Converge As Markets Normalize, March 2020 03/01 03/03 03/05 03/07 Price Innovation in NAV tends to lag. 03/09 03/11 -FLOT LQD -MUB Source: BlackRock, Bloomberg. 3/31/20 03/13 03/15 03/17 03/19 03/21 HYG -TLT 03/23 Convergence occurs once volatility / lag effects dissipate 03/25 03/27 03/29 03/31 Net Asset Value ICRMH0920U-1319728-7/13#8Liquidity: Bond ETF volumes tend to accelerate during Volatility While liquidity became challenged in the underlying bond markets, bond ETFs traded at record volumes on exchange. Average daily volume during Q1 2020 was more than 2x that of 2019. Primary to secondary ratio rose modestly in stress period BlackRock Average Daily Exchange Volumes ($bn) $ billions $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 FLOT LQD HYG 2019 1Q-2020 Average Primary to Secondary Volume % TLT January- February 9.83% TLT LQD 12.99% HYG 7.99% Source: BlackRock, based on data from Bloomberg as of 4/30/2020. MUB March- April 10.28% 14.66% 9.58% ICRMH0920U-1319728-8/13#9Liquidity: Bid-ask spreads - “liquidity mismatch"? Average bid/ask spread (price bps), March 2020 160 140 120 100 80 60 40 20 0 Broad U.S. Market treasuries ETF bid/offer BlackRock L 11 Investment High yield Emerging grade corporates market corporates debt Source: BlackRock, Bloomberg. 3/31/20 Underlying bid/offer Bid/ask spreads for fixed income ETFs are much lower than that of individual bonds. Is this a concern - "Liquidity mismatch"? No. Bond ETFs should trade at tighter spreads (portfolio effects, transparency/efficiency of exchange). Bond ETFs represent a diversified portfolio of bonds: less idiosyncratic risk than individual bonds. ICRMH0920U-1319728-9/13