BlackRock / iShares Could Shake Things Up

by on June 15, 2009

Weeks of speculation ended on Thursday with news that Barclays had accepted a $13.5 billion offer from BlackRock (BLK) for BGI, which includes its market-leading iShares fund family. Following the completion of the cash and stock deal, Barclays will own nearly 20% of the combined entity. Although BlackRock was widely expected to emerge as the winner in the iShares sweepstakes, the acquisition nevertheless represents a major development in the ETF industry. Overnight, BlackRock has gone from an outside observer to the major player in the industry, with more than 350 global funds. Although many transitions resulting from the transaction will go unnoticed, BlackRock’s entrance in the the ETF industry could spur some interesting developments that draw a great deal of attention. A look at three potential changes that could come out of this deal: 

  • Higher fees: Although Barclays’ sale of its iShares unit was motivated by its needs to bolster capital, the deal is far from a fire sale. The purchase price paid by BlackRock was approximately 13 times earnings before interest, taxes, depreciation, and amortization (EBITDA), similar to BlackRock’s current overall multiple. So BlackRock must be planning on squeezing more out of iShares than the fund family is currently generating. While introduction of new funds and growth in existing ETFs will contribute, another possibility is raising the management fees charged by the ETFs. Although BlackRock CEO Laurence Fink has indicated his company won’t raise rates, I wouldn’t be surprised to see expense ratios gradually creep higher. Most iShares ETFs currently charge fees in the neighborhood of 0.20%.
  • ETFs in Retirement Plans: Despite their widespread popularity among investors, ETFs haven’t been able to penetrate retirement portfolios, which continue to be dominated by mutual funds. The hurdle is primarily an operational one – most 401(k) back offices simply aren’t set up to handle ETFs. While mutual funds will obviously resist any changes to the current system, BlackRock’s weight and influence may facilitate the introduction of ETFs into the retirement accounts of many investors. “I think the expenses associated with many retirement products overwhelm some of the relative returns,” Fink noted. “Some passive strategies will have a larger component to the future of our retirement strategies.”
  • Actively-Managed ETFs: The iShares acquisition represents a significant strategic change for BlackRock, which has traditionally overseen the active management of client funds. Although current trends undoubtedly favor passive indexing strategies, the launch of several actively-managed ETFs has presented these “hybrid” investment vehicles as yet another investment innovation. Given its expertise in the active management arena, I would expect BlackRock to launch its first actively-managed ETF within a few months, and to be the leader in the budding field before the end of the year.