ETF Investing

Newly expanded iShares poses stronger challenge to the broader fund market
By Gail Bebee | 23/04/12

Even before its takeover of Claymore Investments Inc., BlackRock Inc. BLK was already a powerhouse in exchange-traded funds in Canada with a market share of 67% of assets under management in its iShares family. Following completion of the deal, it now commands about 80% of the roughly $49-billion Canadian ETF market.

About the Author
Gail Bebee is an independent personal finance speaker, teacher and the author of No Hype--The Straight Goods on Investing Your Money. She can be reached at; her website is

What can investors expect from the newly bulked-up BlackRock? Will price, service and product choice suffer, given the dominance of one issuer in the Canadian ETF marketplace?

With the acquisition, BlackRock inherited a number of ETFs that strayed beyond its usual modus operandi of capitalization-weighted index products. Claymore's line-up of fundamental index, equal weight, inverse and actively managed ETFs, and closed-end funds barely overlapped iShares product offerings.

According to Mary Anne Wiley, managing director and head of iShares in Canada, acquiring the Claymore ETFs with their different modes of index construction is part of BlackRock's ongoing commitment to offer products to fit the needs of all types of clients.

One of the main goals in development of the combined iShares-Claymore product offering was to preserve the best of what investors found attractive about the two firms.

Before settling on the post-takeover fund line up, the iShares team evaluated each fund using three criteria:

  • Is there a long-term need for the product to meet client demand?

  • Is there sufficient differentiation between the fund and existing iShares products?

  • Is the ETF mandate consistent with the iShares brand?

Since completing the purchase of Claymore in early March, BlackRock has moved quickly to add nearly all of the 38 Claymore ETFs to its existing line-up of 48 ETFs. Almost without exception, the Claymore ETFs have been rebranded under the iShares banner, with ticker symbols remaining the same.

Missing from the combined line-up is the Claymore Inverse 10-year Government Bond ETF CIB which will be terminated about June 22. Wiley, who will be a speaker at the Morningstar Investment Conference on June 6 in Toronto, indicated that the complex design, short-term focus and speculative nature of this fund did not fit the iShares product philosophy.

Claymore's closed-end funds (exchange-listed funds that issue a fixed number of shares) have not been rebranded with the iShares moniker. The two silver-bullion ETFs now sport the BlackRock name, so are likely to remain in the line-up. The jury could still be out on the two Big Bank Big Oil Split Corp. funds (capital and preferred share versions) which were not renamed.

The expanded offering includes seven multi-asset-class ETFs. There are two growth-oriented core-portfolio funds and two conservative/income core-portfolio funds. These four funds have total assets of only about $100 million. The fastest growing ETF in the iShares line-up is another conservative, income-oriented multi-asset class fund, iShares Diversified Monthly Income XTR, which has net assets of over $440 million.

Client demand for such one-stop investment solutions is clearly strong. A streamlined offering of multi-asset class ETFs with distinct, well-defined mandates, coupled with a focused marketing plan, would seem to be a great growth opportunity with benefits for both BlackRock and investors.

Claymore's dividend reinvestment plan (DRIP), pre-authorized cash contribution (PACC) and systematic withdrawal plan (SWP) are being retained for the former Claymore funds. Given client demand, iShares plans to expand the DRIP option to all iShares ETFs.

Claymore's advisor-class versions of its ETFs, whose higher fees include compensation for brokers, will also remain. Wiley views these purchase options as another tool for reaching advisors who subscribe to the commission model of financial advice. However, no decision on expansion of this class to other iShares funds has been announced.

Currency hedging is another area where Claymore provided choice. For instance, it offered both hedged and un-hedged versions of its U.S. equity ETFs that are based on the FTSE RAFI methodology. For any new U.S. or international mandates, says Wiley, the decision to offer hedged or unhedged versions will be made on a case-by-case basis.

With its robust offering of transparent, low-cost ETFs to meet investors' needs, BlackRock, the world's biggest asset manager, is primed to pose a more powerful competitive challenge in the Canadian fund-management business. Its Canadian-listed ETF assets under management currently amount to less than 5% of the estimated $810 billion held by mutual funds.

By converting mutual-fund holders to ETF investors and by successfully selling direct investors in stocks and bonds on the merits of ETFs, Wiley intends to substantially increase her firm's share of the Canadian asset-management pie.

BlackRock will undoubtedly maintain its focus on quality customer service, solid product choice and low fees, as it competes with existing ETF providers and those yet to come. Investors should benefit from this competition and from BlackRock's ambitious challenge to the broader investment-fund market.

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