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ETF Due Dilligence Series: Inside iShares

In a new series, Morningstar associate director of ETF research Jose Garcia-Zarate takes an in-depth look at some of the biggest ETF providers in the market. This week he examines iShares

Jose Garcia-Zarate 12 June, 2019 | 7:43AM

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The growing popularity of exchange-traded funds mean that investors now have tens of thousands of trackers to choose from. But where to start? Considerations including assets under management, tracking error, charges and the track record of the fund group. But with hundreds of ETF all promising to track the same market, picking a fund can seem an impossible task.

In a new series, Morningstar associate director of ETF research Jose Garcia Zarate takes an in-depth look at some of the biggest ETF providers in the market. This week he examines iShares.

iShares is the largest ETF provider in Europe, with a market share of 44.6% as of April 2019. The group has a 300-strong range of equity and bond ETFs, all offering physical replication, and spanning a wide variety of market exposures, ranging from plain vanilla to strategic beta, thematic and ESG-focused strategies. The passive investment arm of investment giant BlackRock has more than $1 trillion of assets under management globally. 

iShares remains a formidable force in the European ETF industry, commanding a hefty market share, particularly in fixed income. This dominance is underpinned by a variety of factors, including its commitment to invest in topnotch technology. The breadth of its product lineup makes iShares a one-stop-shop solution for many investors.

For equity ETFs, portfolio managers opt for full replication whenever feasible, meaning they invest in all of the equities in the given benchmark. For ETFs that track markets with liquidity constraints and/or high transaction costs, they use optimisation, buying the securities which provide the most representative sample of the index

Focused on Fees

iShares has responded to competition from other providers by cutting fees on its core equity range. While welcome, this has widened the fee differential with the rest of the product lineup. Fixed income is an area where fee cuts have been lacking, and its mainstream bond ETF offering now looks pricey relative to competitors.

We hold the iShares ETF portfolio management team in high regard. Its size dwarfs some of its competitors, and it counts on the support of extensive resources across the BlackRock group, including large-scale global trading capabilities.

iShares’ securities-lending programme seems tightly controlled for risk, and the proceeds from this practice typically help to lower the overall cost of investing in iShares ETFs relative to cheaper competitors. However, the large on-loan volumes for some ETFs can be unnerving for investors.  BlackRock acting as the lending agent creates a conflict of interest.

Strong Stewardship

As one of the largest shareholders of companies globally, BlackRock is aware of its responsibility and power of influence, and we are positively about the fact it has become more vocal about material ESG issues, including climate risk. The firm has also stepped up its stewardship activities, with growing headcount in the Investment Stewardship team and a higher number of engagements. In terms of the information provided to investors, disclosing rationales for key votes and more details on engagement activities would be welcome.

The BlackRock Investment Stewardship (BIS) team consists of more than 40 people dedicated to voting and engagement. BlackRock votes for all ETF holdings where feasible. The team prioritises engagements based on its level of concern and the likelihood that the engagement will lead to positive change. It favours private direct engagement with companies to foster a fruitful long-term relationship.

Our findings are collated in the publication A Guided Tour of the European ETF Marketplace.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Jose Garcia-Zarate

Jose Garcia-Zarate  is Associate Director of Passive Strategies Research for Morningstar Europe

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