Even with $2.4 trillion in ETF assets spread across more than 400 ETFs, there’s a pending offering from BlackRock that caught my eye.
Before I lose you, dear reader, I’m not talking about the hopefully soon-to-be-approved iShares Bitcoin Trust. VettaFi expects multiple spot bitcoin ETFs to be trading by mid-February 2024 when we kick off the Exchange conference. BlackRock is likely to offer one of them. No, I’m talking about BlackRock U.S. Industry Rotation ETF
BlackRock has expanded its active ETF lineup in 2024, tapping into the expertise of some of its established mutual fund managers. However, this industry rotation ETF — which was just filed for this week and should come to market in early 2024 — is notable for a few reasons.
The fund will be managed by a a trio from BlackRock’s model portfolio solutions group. We think this new ETF will help them run a more tax-efficient strategy. This group runs ETF and mutual fund multi-asset portfolios that are available for financial advisors to leverage. Those that do tap into BlackRock’s expertise and free up time to support client objectives outside of money management.
Growth Potential of Model Portfolios
VettaFi spoke recently to Dominik Rohe, head of BlackRock Americas ETF and Index Investments business. He highlighted the growth potential for fee-based model portfolios managed industrywide.
“In the U.S., we expect total assets in managed models will more than double from $4.5 trillion today to over $10 trillion by 2027, explained Rohe. “As fiduciary wealth management becomes predominant, managed model portfolios are the main way wealth managers scale their practices, ensuring a more consistent investment experience. As managed models grow, we believe ETFs will also grow well beyond the core.”
We believe BlackRock’s model portfolio solutions group manages close to $100 billion in assets. That’s large enough that when BlackRock makes a move, we often see it days later in the ETF flow leaderboard.
BlackRock’s Model Changes Leave Footprints
For example, on March 20, 2023, the iShares MSCI USA Quality Factor ETF (QUAL ) pulled in $4.8 billion, erasing its prior one-year net outflows. The same day, the iShares ESG Aware MSCI USA ETF (ESGU ) had a $4 billion net outflow. At the time, some made the net ouflow for ESGU about a backlash toward ESG. However, VettaFi believed BlackRock’s model group made a move to “further tilt toward equity risk reduction favoring large- and mid-cap stocks amid a shifting macroeconomy and the impact of the bank failures on monetary policy.”
More recently, the iShares S&P 100 ETF (OEF ) had a $1.6 billion net inflow on October 20. Tushar Yadava, a BlackRock multi-asset investment strategist, was on Bloomberg Television on November 6. In explaining the model shift that led to OEF flows, Yadava, said “heading into year-end, we’d much rather own the largest stocks sector by sector.”
A Different Approach to Sector Rotation
According to its prospectus, the BlackRock Industry Rotation Fund will normally hold common stock of those companies that fall in the industries that make up the MSCI USA Index. While this is traditional for active equity ETFs, many industry or sector rotation strategies own other ETFs.
For example, let’s look at the SPDR SSGA US Sector Rotation ETF (XLSR ), a $390 million fund. XLSR owns 35% of assets in the Technology Select Sector SPDR (XLK ) and 15% in the Financial Select Sector SPDR (XLF ). Meanwhile, the First Trust Focus 5 ETF (FV ) owns 20% stakes in ETFs like the First Trust NASDAQ Semiconductor ETF (FTXL ) and the First Trust Dow Jones Internet Index Fund (FDN ). FV manages more than $3 billion in assets.
How This BlackRock Fund Will Be Run
The BlackRock Industry Rotation Fund will dynamically adjust its exposures around its benchmark allocation. In electing securities for the Fund, management will take into consideration five potential sources of return. Those include information about the current economic cycle, valuation, quality metrics, analyst expectation data, and recent trends for each industry. We think this fund could serve as part of a core allocation, replacing an index-based ETF.
We further think this will be a tax-efficient, scalable approach. Currently, if the model team wanted, for example, to shift an industry allocation from semiconductors to biotechnology, they might sell the iShares Semiconductor ETF (SOXX ) and buy the iShares US Biotechnology ETF (IBB ). Advisors that followed the model would create a taxable event for their clients with the allocation change. In the near future, the BlackRock model, as well as models managed by many others across the ETF ecosystem, could own the BlackRock Industry Rotation ETF. The industry rotation ETF could sell shares of Advanced Micro Devices, Broadcom, and peers to make room for Amgen, Gilead Sciences, and others in the diversified fund.
We also believe BlackRock will make more dynamic adjustments to this pending, more diversified ETF than to a more targeted stand-alone industry ETFs. Given BlackRock’s scale, in our opinion, this could easily be a $5 billion ETF not long after it launches. That’s separate from the advisor audience that might find it appealing to leverage BlackRock’s expertise.
For more information, please visit VettaFi.com.