BlackRock, the world’s largest asset manager that has a multitrillion-dollar kingdom of passively managed portfolios, is turning to robots to drive its latest push into active ETFs.
The firm is starting a suite of ETFs under the iShares Evolved brand. The funds will pick their holdings in industries such as technology, innovative health care and media entertainment based on machine learning and natural language processing, according to a BlackRock statement Friday.
“We’ve learned that one size just can’t fit all,” says Jeff Shen, co-head of investments for BlackRock’s Systematic Active Equity group. “The old days of thinking that companies do one thing and one thing only is long behind us and with that comes the recognition that a particular company can belong to various sectors.”
For example, consider Amazon, which traditionally is a top holding in most retail funds. But the company has evolved to the point where it’s also considered a giant among technology stocks. So Amazon will be a holding in the new iShares Evolved U.S. Technology ETF, one of the seven new funds.
BlackRock’s so-called systematic active equity group will be able to use natural language processing to give investors more forward-looking views of sector definitions because the information can be obtained by scanning regulatory filings, Shen says. So investors are likely to see movement in the funds’ holdings every month.
The demand from millennial investors for “everything AI” has become insatiable, according to Josh Lukeman, head of ETF market making for the Americas at Credit Suisse. This may help BlackRock make good on its prediction that half of U.S. investors will own an ETF by 2020.
“As ETF classifications evolve, AI technology could be at the forefront in stretching self-indexing to its limits, spawning a new era in ETF issuance,” he says.
The new sector funds are cheaper than BlackRock’s legacy sector lineup, with fees of $1.80 for every $1,000 invested compared with $4.30 for the firm’s earlier suite.
Still, the new strategies will likely struggle to pry money away from the cheap, uber liquid sector favorites out there, like the $21 billion Technology Select Sector SPDR Fund (XLK) or the $32 billion Financial Selector Sector SPDR Fund (XLF), said Bloomberg Intelligence analyst Eric Balchunas.
“These funds might lure the people who are unhappy with active mutual fundsand want to decorate their portfolio with a low cost theme they can easily understand,” Balchunas said. “It’s harder to peel off assets from monsters like XLK or XLF which are more liquid than the ocean.”