BlackRock's active equity overhaul that, in part, segments mutual funds into four distinct product ranges follows the same delineation approach the firm uses with its iShares exchange-traded funds.
That strategy, designed to align with specific client needs, has indeed proven successful: iShares owns the overwhelming share of the U.S. ETF market, with $1.06 trillion in assets under management of the industry's $2.76 trillion. Globally, iShares AUM comes to $1.4 trillion of a total $3.8 trillion.
Since Donald Trump's election to the presidency, iShares has enjoyed even stronger inflows than it captured in 2016, Heidi Richardson, head of investment strategy for U.S. iShares, told ThinkAdvisor in an interview.
Further, she discusses a handful of her current iShares investing suggestions, as well as BlackRock's active-like smart beta strategy to enhance passive ETFs employed, for example, to minimize volatility.
BlackRock's equity platform reorientation and just-launched Advantage series of lower-cost mutual funds has "no impact to our iShares business" right now, a BlackRock spokesperson told ThinkAdvisor.
In a September 2016 survey of U.S. investors and financial advisors, the firm found that, of the 409 FA respondents, 94% expected to use ETFs in client portfolios this year.
This past February, iShares gathered the largest net inflows for exchange-traded funds and products (ETPs) listed in Europe, totaling $3.89 billion, according to ETFGI, a research and consultancy that tracks global ETF trends.
ThinkAdvisor recently spoke by phone with San Francisco-based Richardson, who was previously a portfolio manager at Goldman Sachs Asset Management and AllianceBernstein. Here are highlights from our interview:
THINKADVISOR: BlackRock's survey of investors and financial advisors last September showed that ETFs will play a larger role in their portfolios in 2017. Have you noted evidence of that with iShares thus far?
HEIDI RICHARDSON: We've seen tremendous inflows in the last three or four months that we hadn't seen in 2016.
Does that have anything to do with Donald Trump's election as president, and his stated policies and reforms?
Some of it does. People are really sifting through to see which [companies] are going to be the winners and losers so they can have much more precise exposure, rather than buying our S&P 500 ETF (IVD), for example. Our U.S. Aerospace and defense ETF (ITA) has essentially doubled in assets, [as has] the area of transportation [investing], ahead of potential infrastructure spending.
iShares sells some actively managed ETFs, but you also offer funds using a strategy that enhances passive ETFs so that, essentially, they're considered active. Please discuss.
We look at some of the exposures we have that use an active overlay as quasi-active ETFs. They fall under our Edge Smart Beta ETFs portfolio and can be used, for instance, to minimize volatility.
What are some iShares investment ideas that you're providing to clients?
Having an overweight position to Japan, for example, with exposure to our large-cap Japan portfolio (EWJ) or even the hedged version (HEWJ). There's a lot of uncertainty and volatility in the U.S. and with what's happening in the U.K. with Brexit and [in other European countries]. So, suddenly Japan looks like the most stable place around. We're seeing a lot of capital flows back into Japan for that stability and less geopolitical risk.
What about emerging markets?
I really like ETFs in emerging markets. For broad exposure, our core portfolio, the Emerging Market Index (IEMG), is the most attractive. It gives you a minimum-volatility type of portfolio at a very low cost.
Why are you presenting these particular suggestions at this time?
The valuations are really attractive, especially as investors have been so U.S.-focused with their exposures: they're really underweight [international and emerging markets]. In this long bull market, valuations in the U.S. have become very expensive. It's time for investors to start thinking about diversifying outside the U.S., especially with valuations, earnings improvements and reforms in [some] countries.
What are your thoughts about using ETFs to invest in the financial sector now?
That's a great way to do it. You can buy the broad sector, or you can be really precise and get exposure, say, to reginal banks. We're overweight financial services and within that, we're overweight regional banks. They're going to benefit more in this inflationary environment and with the Fed embarking on raising interest rates.
What are the pitfalls to buying commodity ETFs?
It depends on the structure of the ETF. There are different ways to own commodity ETFs. With our gold ETF (IAU), you own shares of the physical bars of gold. Some gold ETFs out there are actually futures contracts on the price of gold. So you can be vulnerable if you don't understand what you're buying.
