What’s Next for iShares?

Back in January, BlackRock—the parent company of iShares—announced that it had acquired Claymore Investments, the second-largest ETF provider in Canada. Since then, BlackRock has been gradually integrating the former Claymore funds into its family. The ETFs were officially rebranded last week and all of them now trade under the iShares name.

Many readers have wondered about what this acquisition will mean for individual ETF investors. On Monday, I had an opportunity to sit down with Mary Anne Wiley, the newly named Head of iShares for BlackRock Canada. Here’s part of our interview—more to come later in the week.

I was surprised when I first heard about the acquisition, but after a bit of reflection, it was clear that the two ETF families actually had very little overlap.

MAW: I think that was the reaction of most people: “I never saw that coming.” But then they took a step back and realized that it made a huge amount of good sense for us, and for the market at large. We have one of the most trusted brands in ETFs, and Claymore had done a really nice job of building a platform that was where iShares was not. They were very smart in building their business.

We had always focused on cap-weighted equities and fixed income based on the DEX benchmarks, whereas Claymore’s equity lineup was not cap-weighted, but rather fundamental indexes. They had also been very creative in the way they built out their bond exposures with the traditional laddered approach, which was very appealing, particularly to advisors. And they have done a great job in the commodity space. So at the end of the day there was almost no overlap.

Does that mean there will be no fund closures?

MAW: We have just announced the closure of one fund: the inverse bond ETF. When we looked at the product lineup and started to make our decisions, there were three criteria we used. The first was whether there was a long-term sustainable place for the ETF in the market. That doesn’t mean it has to be buy-and-hold-forever, but we are not looking for the hottest thing that is going to sell a lot today but have no longer-term appeal. Second, it had to be something unique or additive: there needs to be something that differentiates it from what is already available. The third was that it had to be consistent with the iShares brand, and what we stand for. And we don’t do inverse. That product was designed to be very short-term; it’s speculative. And the market hasn’t really embraced it. So as a result, we announced that fund would be closing.

But outside of that, we have come out and said we are going to continue to promote the Advisor Class ETFs, which is new for iShares. The laddered bond ETFs, the RAFI indexes, the commodities—we are supporting all of these other families of products, which hopefully confirms that we stand behind what we said, that these are a great complement.

That said, there is a little bit of redundancy in the two families, and I think the most obvious is CWO and XEM, which both invest in broad emerging markets, and according to your website, both track the same index. Will we see these funds merged?

MAW: If we go back to the three criteria I talked about earlier, I think we all agree that emerging markets has long-term sustainable merit. So, are the two products unique? Their holdings today are actually different, and we want to make sure that going forward they are sufficiently different. If not, then we would consider merging them. I don’t have the answer for you today, but it might make sense to take CWO and convert it to a RAFI strategy. That is one of the things we’re looking at doing.

Another example that I have been asked about are the two dividend funds: XDV and CDZ. They are quite different, but at first blush, they are going after the same segment of the market. XDV is focused on dividend yield, while CDZ is focused on dividend growth. So the composition is different, and an investor can actually make a decision on whether one makes more sense than the other. That is another instance where we will support both, because there is a market for both.

How does this affect your plans to launch your own new products? I know you already had a number of them in the pipeline. Now that you have just added dozens of new ETFs, will these be delayed?

MAW:  No, not at all. There will be new products. The iShares brand now has new products because of the acquisition, but the marketplace doesn’t. There are still needs that haven’t gone away, and we want to be the player who meets those evolving needs. I don’t think the world needs another large-cap Canadian equity ETF: that’s covered. But there are strategies and segments of the market that are appearing in the ETF space, and we want to be the provider that brings them out. As long as they are additive, and there is a long term place for them in the market, and that they’re consistent with the iShares brand.

10 Responses to What’s Next for iShares?

  1. Eric April 3, 2012 at 11:53 am #

    I was looking for an alternative for CDZ since it’s a core holding in my portfolio. Thank’s for the interview.

  2. JAH April 3, 2012 at 2:01 pm #

    Similar to Eric, I have the Canadian dividend equity portion of my portfolio split between XDV and CDZ.

    Would be interesting to see how they plan to continue differentiating these going forward, and whether there might be an even better approach that lets an investor hold just one fund.

  3. Canadian Couch Potato April 3, 2012 at 4:26 pm #

    @Eric and JAH: My guess is that these will remain two distinct funds. The index methodologies (and, as a result, the ETF holdings) are very different. Vanguard in the US has a similar pair of offerings—one that focuses on high yield, and the other that focuses on dividend growth. So there’s a precedent for this split.

  4. Canadianmdinvestor April 3, 2012 at 4:30 pm #

    I have both dividend etfs as well.

    I hope iShares moves the dividend payment date to end of month, instead of 6th of the following month, as per claymore.

    It Would make record keeping much easier!!!

    I realize it is not all about me, bit nevertheless… 😉

    C’mon iShares…

  5. MyCanadianFinances April 3, 2012 at 5:44 pm #

    I am very glad they are keeping both dividend funds, as both interest me. I am unsure of which one I will be including into my portfolio yet, but at least now I still have options.

  6. Andrew April 4, 2012 at 4:00 pm #

    I hope they convert CWO to a RAFI strategy.

  7. CanadianInvestor April 5, 2012 at 11:42 am #

    I’d also like to see CWO based on RAFI … but with a low fee of 0.2% or less.

  8. Canadian Couch Potato April 5, 2012 at 12:33 pm #

    @CanadianInvestor: The PowerShares RAFI Emerging Markets ETF in the US charges 0.85%. Even Vanguard’s VWO costs 0.20% with $70 billion in scale. Given the trading costs involved in emerging markets stocks, the prices will always be relatively high.

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