iShares Teams With RIAs in Fund Design

April 18, 2013 (PLANSPONSOR.com) – BlackRock turned to registered investment advisers (RIAs) for help in developing its new exchange-traded funds (ETFs).

The two sets of products—the iShares Enhanced ETFs, which are managed using BlackRock research rather than tracking an index, and the iShares MSCI Factor ETFs, which seek to track MSCI Risk Premia Indices—were designed in partnership with RIAs and institutional investors, specifically public pensions, to provide a broader range of solutions to help manage equity exposures and risk. According to Patrick Dunne, head of iShares global markets and investments, the launch of actively managed ETFs enables BlackRock to expand its product suite and meet specific client demands.

The enhanced ETFs from iShares—U.S. Large-Cap ETF (IELG) and U.S. Small-Cap ETF (IESM)—were developed in close collaboration with RIAs, who want ETFs with access to quality, value and size. The funds utilize the pioneering research on factor investing and expertise in risk management of BlackRock rather than tracking an index or individual stock picking. The ETFs seek to provide competitive risk-adjusted returns compared with the broad large-cap or small-cap market.

The iShares MSCI Factor ETFs—MSCI USA Momentum Factor ETF (MTUM), MSCI USA Size Factor ETF (SIZE) and MSCI USA Value Factor ETF (VLUE)—were designed at the request of institutional investors, such as Arizona State Retirement System (ASRS), that want exposure to a specific individual factor, such as value, size or momentum, so they can overweight or hedge a single factor that has historically explained a significant part of companies’ return and risk over the long-term.

ASRS saw that careful portfolio design can be a valuable way to control factor risk and a viable diversifier. The collaborative partnership of ASRS, BlackRock and MSCI was instrumental in developing the iShares MSCI Factor ETFs.

Factors are a set of investment characteristics that explain the risk and return behavior of an asset or stock. Every asset has a unique set of factor exposures—such as quality, value, size and momentum—that influence the asset’s return. Factor investing is a well-documented, differentiated approach to traditional market-capitalization investing. iShares currently offers a suite of products that look at minimum volatility as a factor to provide broad, diversified market exposure with potential reduced volatility. 

“The expansion of iShares Factor ETFs demonstrates how iShares has raised the bar of ETF development by working alongside clients,” Dunne said. He said that the firm plans to continue developing products that are client-led, in order to meet their most pressing portfolio challenges.

“The iShares MSCI Factor ETFs compliment iShares’ suite of minimum volatility products, and the iShares Enhanced ETFs can benefit from BlackRock research, portfolio implementation, and risk management expertise for our clients,” Dunne said. 

Jill Cornfield

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