learning what to look for when selecting an ETF. The initial phase of the campaign is the publication of an Investor ETF Checklist and an accompanying educational video, both available on the iShares website.
Investor interest in ETFs has grown dramatically, with $632 billion in new assets flowing into ETFs in nearly the past five years alone¹. During that time, 32 new ETF providers have entered the market and 839 new ETFs have been launched². This growth reflects the benefits ETFs offer as part of a diversified investment portfolio. However, investors should understand that not all ETFs are created equal.
Noel Archard, Head of US iShares Product at BlackRock, said, “ETFs offer investors attractive benefits both large and small, but investors need to take a close look under the hood when considering a particular ETF product to understand the key factors that will impact its total performance over time. Our campaign aims to assist investors in choosing wisely as they navigate the growing number and complexity of ETF products in the marketplace today.”
As a first step in this new campaign, iShares is offering an Investor ETF Checklist that identifies five factors that drive ETF total performance, and that investors should be aware of prior to investing in an ETF. These include:
- Exposure and Tracking Efficiency — Index ETFs are designed to track the performance of a given benchmark. Key considerations for investors include the reputation and quality of the index to which they seek exposure, how closely the ETF manager replicates the performance of that benchmark and the transaction costs incurred in doing so.
- Structure — Single class, stand-alone ETFs are generally able to insulate investors from certain costs created by other shareholders in the fund, tax efficient and transparent in holdings. But more ETFs are being launched that use other structures, such as a multi share class structure. While certain traditional mutual funds and multi class structures can be tax efficient as well, alternatives to a single class ETF may not provide all of the expected benefits of an ETF.
- Total Costs — The low cost of ETFs is one factor that can make them an attractive investment vehicle. The annual expense ratio is one cost, but not the only one. Investors should factor in all costs associated with a given ETF, including trading costs, tax costs, and commission costs, among others.
- Liquidity — ETFs offer investors the ability to buy or sell in real time, throughout the trading day. However, not all ETFs have the same level of liquidity, and less liquidity can raise trading costs or limit the ability of investors to trade when they want or in times of distress.
- Manager’s Track Record — The experience of an ETF manager can be an important factor in its ability to deliver the optimal mix of returns, liquidity, tax efficiency and transparency to investors across all types of market environments. Some managers may have jumped on the ETF bandwagon without having a core competency in ETFs.
iShares plans to roll out additional educational tools to help investors understand how to select an ETF and to deepen their understanding on each of these factors in 2011.
BlackRock is a leader in investment management, risk management and advisory services for institutional and retail clients worldwide. At September 30, 2010, BlackRock’s AUM was $3.446 trillion. BlackRock offers products that span the risk spectrum to meet clients’ needs, including active, enhanced and index strategies across markets and asset classes. Products are offered in a variety of structures including separate accounts, mutual funds, iShares® (exchange traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors through BlackRock Solutions®. Headquartered in New York City, as of September 30, 2010, the firm has approximately 8,900 employees in 24 countries and a major presence in key global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa. For additional information, please visit the Company’s website at www.blackrock.com.
iShares is the global product leader in exchange traded funds with over 460 funds globally across equities, fixed income and commodities, which trade on 19 exchanges worldwide. The iShares Funds are bought and sold like common stocks on securities exchanges. The iShares Funds are attractive to many individual and institutional investors and financial intermediaries because of their relative low cost, tax efficiency and trading flexibility. Investors can purchase and sell shares through any brokerage firm, financial advisor, or online broker, and hold the funds in any type of brokerage account. The iShares customer base consists of the institutional segment of pension plans and fund managers, as well as the retail segment of financial advisors and high net worth individuals.
Know the Differences
ETFs and mutual funds each hold baskets of securities. ETFs trade on exchanges intraday at market price, which may be greater or less than net asset value. Shares of ETFs are not individually redeemed from the fund. Transactions in shares of ETFs result in brokerage commissions and generate tax consequences. Index ETFs seek to track a market index, before fees and expenses, and do not attempt to outperform during rising or declining markets. ETF performance may diverge from the ETF’s underlying index. Mutual funds are accessed directly from the fund company or through a select broker, pricing generally occurs once a day, and investors buy or redeem shares at the end-of-day net asset value, less any applicable fees. Some mutual funds may charge sales loads or redemption fees. Active mutual funds seek to outperform their benchmark while the goal of index mutual funds is to track their index. Consequently, active funds typically charge more than index-linked products for the increased trading and research expenses that may be incurred. Mutual funds and ETFs are obliged to distribute portfolio gains to shareholders.
Dedicated share class ETFs are stand-alone products made up of a portfolio of securities and have a single expense ratio with fund expenses distributed pro rata across all ETF shareholders. Shareholders are insulated from the transaction costs and capital gains created by other shareholders. Multi-share class ETFs are a distinct share class of an existing mutual fund and are a share of an investment pool invested in a portfolio of securities. Each share class has a unique expense ratio and ETF shareholders pay for costs incurred by other share classes. ETF shareholders may receive capital gains distributions created by transactions of mutual fund shareholders.
Carefully consider the funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the funds’ prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737) or by visiting www.iShares.com. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal. Diversification may not protect against market risk. Past performance does not guarantee future results.
Investment comparisons are for illustrative purposes only and are not meant to be all-inclusive. To better understand the similarities and differences between investments, including investment objectives, risks, fees and expenses, it is important to read the products’ prospectuses.
Mutual funds and ETFs are obliged to distribute portfolio gains to shareholders by year-end. These gains may be generated due to index rebalancing or to meet diversification requirements. Trading shares of ETFs will also generate tax consequences and transaction expenses. Certain traditional mutual funds can be tax efficient as well.
Shares of the iShares Funds may be sold throughout the day on the exchange through any brokerage account. However, shares may only be redeemed directly from a Fund by Authorized Participants, in very large creation/redemption units. There can be no assurance that an active trading market for ETF shares will develop or be maintained.
The iShares Funds (“Funds”) are distributed by SEI Investments Distribution Co. (“SEI”). BlackRock Fund Advisors (“BFA”) serves as the investment advisor to the Funds. BlackRock Fund Distribution Company (“BFDC”) assists in the marketing of the Funds. BFA and BFDC are affiliates of BlackRock, Inc., none of which is affiliated with SEI.
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