(Bloomberg) -- Investors poured into BlackRock's low-cost ETFs in the first quarter, helping the world's largest money manager beat its earnings estimate.
BlackRock attracted a record $64.5 billion into its iShares ETFs, the New York-based firm said in a statement Wednesday. Profit was also boosted by a tax benefit while revenue missed expectations, hurting the shares.
BlackRock, led by CEO Laurence D. Fink, is riding a wave of investor interest in cheap passive funds even as the shift hurts its U.S. active business. IShares took in a record $140 billion of new flows last year, helped by fee cuts in October on core stock and bond ETFs targeting buy-and-hold investors. The firm's assets under management increased to $5.4 trillion.
"Core is driving flows," Fink said in an interview, noting that half of the flows went into that segment. "If we did not do those price cuts last year we would not have had those flows. When we lowered our cost in the core series we saw accelerated flows in non-core."
BlackRock, the world's largest ETF provider, has fended off rivals Vanguard and Charles Schwab that have also aggressively cut prices to attract assets. But the low ETF fees as well as the weak performance from active strategies have squeezed revenue.
Revenue in the first quarter rose 8% to $2.82 billion compared with the same period last year. But the firm missed analysts' estimates as advisory and distribution fees fell. A lower tax rate in the quarter helps explain why the firm beat earnings predictions while missing on revenue.
Shares of BlackRock fell 1% to $379.50 at 10:21 a.m. in New York. This year they have dropped less than 1% compared with a 1.7% increase for S&P's index of asset managers and custody banks.
Net income rose 31% to $862 million, or $5.23 a share, from $657 million, or $3.92. Adjusted earnings of $5.25 a share beat the $4.89 average estimate by 13 analysts surveyed by Bloomberg.
In 2016, BlackRock reported its first decline in annual revenue since 2009 as performance fees fell by more than half, according to Bloomberg Intelligence. U.S.-based active mutual funds at BlackRock had a record $19.3 billion in outflows last year, according to estimates from Morningstar.
"They are almost giving it away for free at this point," Kyle Sanders, an analyst at Edward Jones, said of BlackRock's core ETFs. "As core keeps growing and becomes a bigger part of the business, that is going to pressure the top line."
BlackRock's passive business took in $82.2 billion in net inflows. The firm continued to have outflows from its active business, with investors pulling $1.8 billion during the quarter.
BlackRock, which has been trying to revive its stock-picking business for years, last month announced another restructuring. It shifted assets from funds run by traditional stockpickers into cheaper computer-driven strategies and fired portfolio managers. The layoffs contributed to a $25 million charge for the first quarter.