BlackRock and Claymore Make Good Partners

Announcements in the ETF world are mostly tedious these days—usually they involve the launch of another exotic and increasingly narrow new product. That’s why yesterday’s announcement that BlackRock is buying Claymore Investments was a shocker. I’m not the only one who didn’t see that coming.

BlackRock, of course, is the parent company of iShares, the largest ETF provider in Canada, with about $29 billion in assets—about 75% of the market. Claymore’s family of ETFs and closed-end funds currently have about $7 billion under management. Together, the two families will be a powerhouse in the ETF space in this country.

It’s way too early to tell what this will mean for Canadian investors, but overall I expect it will be a positive development. I’ve always liked Claymore’s entrepreneurial spirit and its desire to innovate. For example, the company was the first to create preauthorized contribution plans that allow investors to add money to their holdings each month without incurring trading commissions. Their recent partnership with Scotia iTrade—which makes all Claymore ETFs available with no brokerage commissions—was also a game changer that prompted Qtrade to follow suit. (Claymore’s DRIP program, in my opinion, was not as innovative or as significant as often believed.)

But as refreshing a presence as Claymore has been, I think BlackRock will take them to the next level. The iShares products are probably the most prudently managed ETFs in the country, with consistently low tracking errors, even when the funds are small. I’ve also found them to be among the most transparent and straightforward firms to deal with as a journalist. The Claymore ETFs are now in good hands.

Opposites attract

In some ways, the two ETF families are unlikely allies. iShares was among the pioneers in the industry more than a decade ago, and they’ve remained steadfast in their position that traditional indexing—plain vanilla, cap-weighted funds that track third-party benchmarks—is still the best solution for investors. Claymore, on the other hand, has been a vocal critic of cap-weighting and the leading Canadian proponent of RAFI fundamental indexes.

But the ETF industry is changing, and both companies recognize that. Investors already have access to plenty of low-cost traditional index ETFs, so there’s little room for growth in that area. The only way a new player could compete in the traditional ETF space would be to lower fees even more. That’s what Vangaurd has done with its Canadian launch, but they are the only company with the size and influence to pull that off. No one else is going to be able to compete on price.

BMO is competing with superior distribution: they have an army of advisors (most of whom have little or no interest in passive portfolio strategies, by the way) selling their products—and they’re doing that extremely well. RBC looks poised to do the same. Meanwhile, other ETF providers will have to compete with each other by offering more and different product choices.

With that in mind, Claymore and iShares are actually a perfect fit. Although they have 82 ETFs between them, there is almost no overlap. I can’t think of a single ETF that is an obvious candidate to be closed or merged with another as a result of this merger. While many asset classes are covered by both Claymore and iShares products, the funds usually track use very different indexes and strategies.

Index investors will be watching with interest as this one unfolds over the next few months.

17 Responses to BlackRock and Claymore Make Good Partners

  1. Michel January 12, 2012 at 12:46 pm #

    I agree with most of your points, except for the fact that the merger is good (perfect fit). Most of the time, in the service industry, bigger is not better. What made Claymore innovative, is called competition, and that’s gone (between them at least). As a retail investor, I really don’t care that they’re now together. I guess we should now count on the BMOs and the Vanguards to provide competition (i.e. lower fees).

  2. Canadian Couch Potato January 12, 2012 at 1:28 pm #

    @Michel: I’m not sure I agree that the acquisition is not good for retail investors. Sometimes bigger does mean better: Vanguard is a prime example, and iShares is not far behind. Bigger ETFs often have lower costs and lower tracking errors. At 20 basis points, a $100 million fund generates just $200,000 in management fees, before expenses. Not exactly a cash cow. But if the fund has $1 billion, then it can afford to charge lower fees.

    That said, although there is more competition than ever in the ETF marketplace, I doubt anyone is going to compete with Vanguard on price: that’s a race to the bottom. The margins are just too small. I don’t expect any ETFs to get cheaper, even though the media keep bringing this up.

    In any case, Claymore has never really been a leader on costs: on average, iShares ETFs have considerably lower MERs, especially for core funds.

  3. Paul T January 12, 2012 at 2:23 pm #

    @CCP, didn’t all of the iShares MERs bump up by 1-5 bps when blackrock bought them? I fully expect this to happen with the Claymore funds when (if) the deal closes. Higher fees are the exact thing the passive investor tries to avoid.

    And wouldn’t the ETF market in Canada be 90% owned by one company (blackrock) if it goes through? I can’t see that being a good thing for the individual investor.

  4. Canadian Couch Potato January 12, 2012 at 2:47 pm #

    @Paul T: All iShares ETFs went up in cost when the Ontario government introduced the HST. But one can hardly blame BlackRock for that. 🙂 I would be shocked if BlackRock raises the fees of any of Claymore’s ETFs. That would be indefensible in the current marketplace.

    I am not aware of any Canadian ETF that has raised its fees after being launched: it doesn’t make a lot of sense to do that. As the asset base grows, they make more and more money without raising the MER. (Vanguard, as you may know, tends to lower its MERs as the funds get larger.)

    It’s conceivable that regulators might get involved if they feel that BlackRock’s market share is excessively large. But with Vanguard here now, and the banks getting into the ETF business, that’s going to start changing very soon.

  5. Brian Gibbings January 12, 2012 at 2:51 pm #

    I don’t agree. It’s hard to see how the combination of these two players will help individual investors.

    Prices will go up. Net-to-investor returns will go down.

    It’s not about “distribution”; it’s about “access” for and by investors.

  6. Jon Evan January 12, 2012 at 2:52 pm #

    Hopefully BlackRock will get rid of Claymore’s advisor-compensation practices! BlackRock has believed in the past that the cost of a fund and the cost of personal advice should be separate from one another. Claymore’s practice of rewarding the advisor for choosing their etfs is nonsense from the perspective of the investor since it puts the advisor in a conflict or interest. Like why would he then suggest the Vanguard etfs for his client?

  7. Canadian Couch Potato January 12, 2012 at 3:21 pm #

    @Brian: “Prices will go up. Net-to-investor returns will go down.” I will stand corrected if that happens. But in this environment, raising ETF costs is tantamount to suicide. BlackRock has nothing to gain by doing that, and an enormous amount to lose.

    @Jon: That will be an interesting question. I expect that a lot of arrangements like this will be grandfathered for many months until everything settles down and BlackRock decides how they these two ETF families will be integrated.

  8. Mike January 12, 2012 at 7:35 pm #

    I tend to agree with the majority that I don’t think this is a good thing for the average investor. Look at what happened with the MF company takeovers… Costs may have stayed the same but many good funds were drained, merged or poorly managed after the superstar managers left.

  9. Paul G January 13, 2012 at 12:35 am #

    I as well dislike losing competition in the marketplace… it’s rarely a winning proposition for consumers.

    We had two big players with two different takes on which strategies to use for ETFs, but whose prices would keep one another in check to a certain extent. That’s now gone, and I can’t see Vanguard’s handful of funds or BMOs ETFs from being enough competition to the elephant in the room…

  10. The Dividend Ninja January 13, 2012 at 10:54 am #

    Generally in any industry, competition is a good thing and a monopoly is a bad thing 😉 We are certainly in uncharted territory here – and as a holder of Claymore products I am indeed concerned. Is this a good or bad thing? Probably too early to tell.

    In the ETF industry however, volume and size means costs will go down, not up as many are assuming here. The whole ETF industry is based on keeping MER’s and fees as low as possible. As CCP points out, raising fees in this industry would indeed be “suicide”.

    The real question is, why was Claymore so quick to sell if they were doing so well? I don’t feel Claymore has been upfront about that question, instead focussing on “product overlap” and other nominal issues etc.

    The Dividend Ninja

  11. Paul T January 13, 2012 at 11:08 am #

    @Dividend Ninja: They (the management) want a huge payout. of course. If they are successful, and are growing market share, why not continue on course? Sounds like the plan was to grow, then “cash in their chips”. I’m sure that Guggenheim partners in New York (a financial backer of Claymore) had a major role to play in this sale.

    @CCP, blackrock did raise their fees (nominally) after the purchase of iShares. Sure it was framed as passing the GST onto the investor (note: I’m not talking about HST here). iShares (as part of Barclay’s) was absorbing that fee, giving them a slight advantage over other ETF providers, so I consider it an increase in fees.

  12. Chad Tennant January 13, 2012 at 1:25 pm #

    This is a good move for iShares as to increase its stranglehold on the competition. Naturally in business you want to remain on top by growing organically and/or acquiring strong companies that make a good fit. From an investor perspective it remains to be seen how Claymore will be positioned amongst the iShares family.

  13. My Own Advisor January 13, 2012 at 7:50 pm #

    Not surprisingly probably, I agree with the Ninja!

    BlackRock is smart to acquire the Claymore suite of ETFs, and in doing so, there is very little they need to change because of it. How many other multi-billion-dollar acquisitions can you say that about? BlackRock now has AUM, $7 billion more, and a dominant place in the Canadian ETF space. They will need to keep their costs very competitive to stay ahead of Vanguard, BMO ETFs, and other emerging players. It would be foolish for them to do anything else. In the ETF industry, looking at Vanguard as a prime example in the U.S., bigger is better for retail investors.

    As a consumer, whether it’s my cable, cell phone or other services, competition is a good thing. I want companies competing for my service(s).

    Cheers Dan!

  14. Andrew F January 17, 2012 at 12:02 pm #

    CCP, you need to consider the counterfactual. Perhaps Blackrock won’t raise fees, but it is possible that fees will fall more slowly than if Claymore remained independent.

  15. Brian Gibbings February 6, 2012 at 1:52 pm #

    Because of a “change in manager control”, unit-holders will get to vote on or before February 24, 2012. It will be interesting to see how Canadian banks who are nominee holders for all of these Claymore funds, respond… whether as fiduciaries, they will choose to vote and/or make their positions clear on the sale of Claymore to Blackrock.


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