iShares expands smart beta factor offering and rolls out active ETFs

Apr 19th, 2013 | By | Category: Equities

BlackRock has announced that its iShares exchange-traded funds (ETFs) business, the world’s largest, has expanded its factor ETF line-up with the launch of two sets of products: the iShares MSCI Factor ETFs, which track specialist smart beta indices, and the iShares Enhanced ETFs, which are actively managed using BlackRock research rather than tracking an index.

iShares expands smart beta factor offering and rolls out active ETFs

BlackRock’s iShares business has expanded its factor ETF offering, which now includes two actively managed products.

The products were designed in partnership with investment advisors and institutional investors, specifically public pensions, to provide a broader range of solutions to help manage equity exposures and risk.

As well as demonstrating the increased adoption of ETFs among professional and institutional investors, the launch of these enhanced next-generation products reflects the rapid evolution and greater sophistication of the ETF industry, which has matured considerably from its early days when products were typically based on conventional broad-market, capitalisation-weighted indices.

Factor-based investing, part of a theme known as smart beta, is gaining significant traction as investors better understand the underlying contributors of risk and return. Factors are essentially a set of investment characteristics which explain the risk and return behaviour of an asset or stock. Every asset has a unique set of factor exposures – such as quality, value, size, volatility and momentum – that influence the asset’s return. Factor investing is a well-documented, differentiated approach to traditional market-capitalisation investing.

Within this realm, iShares currently offers various suites of ETFs including size, growth and value-based products. It also offers a popular range of minimum volatility ETFs, which aim to provide broad diversified market exposure with reduced volatility. iShares’ newest additions in this space are the iShares MSCI USA Momentum Factor ETF (MTUM), the iShares MSCI USA Size Factor ETF (SIZE) and the iShares MSCI USA Value Factor ETF (VLUE), all listed on the NYSE Arca. The funds each charge 0.15% pa.

These latest ETFs were designed at the request of institutional investors, such as Arizona State Retirement System (ASRS), who want exposure to a specific individual factor – value, size or momentum – so they can overweight or hedge a single factor that has historically explained a significant part of companies’ return and risk over the long-term.

Patrick Dunne, Head of iShares Global Markets and Investments, said: “The expansion of iShares Factor ETFs demonstrates how iShares has raised the bar of ETF development by working alongside clients. Increasingly we plan to develop products that are client-led to meet their most pressing portfolio challenges. The iShares MSCI Factor ETFs compliment iShares’ suite of Minimum Volatility products and the iShares Enhanced ETFs can benefit from BlackRock research, portfolio implementation, and risk management expertise for our clients.”

The new iShares Enhanced ETFs range was developed in close collaboration with investment advisors who want access to multiple factors – quality, value and size – packaged in a single ETF. It includes the iShares Enhanced US Large Cap ETF (IELG) and the iShares Enhanced US Small-Cap ETF (IESM), both listed on the NYSE Arca. The funds charge 0.18% and 0.35% pa respectively.

The funds, which seek to provide competitive risk-adjusted returns compared to the broad large-cap or small-cap market, utilise the pioneering research on factor investing and expertise in risk management of BlackRock rather than tracking an index or individual stock picking.

The launch of active ETFs by iShares provides an insight into where the giant ETF manager sees future growth coming from.

“iShares is in the business of providing transparent, liquid market exposures to retail and institutional investors globally. While we continue to see tremendous demand from investors for index-based ETF products, there are situations where clients are seeking exposures that cannot be delivered by tracking a third-party index. Launching `active’ ETFs enables us to expand our product suite and meet this client demand”, added Dunne.

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