Barclays (BCS) sale of Barclays Global Investors (BGI) to money manager BlackRock generated a lot of questions about what this means for the future of the iShares group, ETF investors, and the ETF industry as a whole.
The first question to answer for ETF investors is, "How will this affect any iShares ETFs that I own?" We think that this will have no effect on the ETFs currently supported by iShares. IShares creates, markets, and administers the funds upon their release, but it is not the market maker or clearinghouse for these ETFs. That happens on the exchanges. Overall, we always felt that iShares operated as a fairly autonomous group within the Barclays umbrella, and it is our belief that it will continue to do so under the BlackRock organization.
It should be noted that the iPath group that provides exchange-traded notes is not included in the transaction and that those funds will continue to be serviced and sponsored by Barclays Capital.
The second question for most investors is whether or not BlackRock will look to increase fees on these products. We think that that will be highly unlikely given the hypercompetitive landscape in ETFs. Liquidity does have a downside for ETF providers like iShares. That is, if investors don't like your fees or your product they can vote with their wallets and easily buy your competition's fund instead of yours with a few clicks on their computers.
The biggest question for us is what the transaction means for iShares and its leadership role in expanding both the number of ETFs and their adoption. IShares is the largest sponsor of ETF products, and its dedication to marketing and product development has helped spur the booming acceptance of these products, regardless of provider. We have no reason to believe that BlackRock will not continue to support the growth of iShares and their role in pushing the ETF market forward in terms of development and acceptance.
This transaction also brings new opportunities for iShares. BlackRock, which is better known for active money management, especially in fixed income, has a stable of established managers and funds to help iShares develop new actively managed ETFs. The idea of putting active management in an ETF structure is gaining steam because of the tax efficiencies that ETFs bring to U.S. investors. Besides the tax efficiency, actively managed ETFs that have entered the marketplace have still managed to keep their expense ratios very low compared with most actively managed open-end funds, doubling the benefits for investors.
Finally, BlackRock has a sizable global salesforce and expertise in marketing to institutions. BlackRock reps co-marketing iShares products could help increase adoption of ETFs by deep-pocketed money managers, helping to improve the overall asset size and liquidity of ETFs. That's something that would benefit investors and traders alike because it would help keep spreads tight and eventually lower the overall fees.
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Disclosure: Morningstar licenses its indexes to certain ETF and ETN providers, including Barclays Global Investors (BGI), First Trust, and ELEMENTS, for use in exchange-traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indexes.
Scott Burns does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.