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BlackRock looks to ‘megatrends’ to expand its ETF business

BlackRock is tired of the conversation about cost.

The world’s largest asset manager, which runs some of the cheapest investment products available, plans to place a greater focus on the quality of the engineering, construction and management of its funds going forward, according to Armando Senra, who recently took over as head of the firm’s ETF business for the U.S., Canada and Latin America.

“There’s too much emphasis purely on cost,” said Senra, speaking at a press event on the “megatrends” that BlackRock sees driving global growth. “We don’t talk enough about quality. That’s not to say we’re not going to be competitive — we have to be competitive, this is a competitive industry — but I would move away from just a low-cost conversation.”

NYSE BlackRock Tickr Image for March 2017
Blackrock Inc. signage is displayed on a monitor on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, March 31, 2017. Photographer: Michael Nagle/Bloomberg

Management fees have been under intense pressure for years, but that crossed a new milestone earlier this year when one ETF provider offered to pay investors to buy its product. BlackRock has already lowered the cost of its broad indexed products to as little as 30 cents for every $1,000 invested, but it’s now developing more sophisticated funds that can also justify higher fees.

The firm is creating ETFs based on what it calls megatrends that go beyond traditional sectors and geographic focuses. Thematic ETFs, which look at stocks across industries in areas like artificial intelligence or electric cars, have grown to almost $47 billion in the U.S., according to data from Bloomberg Intelligence.

While that pales in comparison to the roughly $3 trillion across stock ETFs, assets have more than doubled over the last two years. These funds charge an average $6.50 for every $1,000 invested, versus the $4.90 charged by stock ETFs.

BlackRock will focus on five themes: technological breakthrough, demographics and social change, rapid urbanization, climate change and resource scarcity, and emerging global wealth. The company started two funds based on those ideas on Thursday: the iShares Cybersecurity and Tech ETF (IHAK) and the iShares Genomics Immunology and Healthcare ETF (IDNA). Both will charge $4.70.

“There’s an investment story and there’s also a theme, a story, that resonates with investors,” said Senra. “We want people to stay invested and that emotional connectivity to the theme, to the story that people understand and can see it in their lives, that really captures people’s imaginations and allows them to stay invested.”

BlackRock took a big step into this arena a year ago, starting the iShares Robotics and Artificial Intelligence ETF (IRBO). The fund hasn’t gained much traction, managing just $38 million, but will form part of the tech suite, alongside IHAK and the $2.4 billion iShares Exponential Technologies ETF (XT).

While there are currently 10 BlackRock ETFs focused on megatrends, the firm hopes to double or triple its offerings over the next 24 months or so, according Chad Slawner, head of product and strategy for U.S. iShares.

“They are not meant to replace a core allocation in the portfolio, they are meant to be a satellite exposure,” said Slawner. And rather than targeting fads, “they are meant to last for 10, 20, 30 years.”

Bloomberg News