iShares ETF Closure: The First of Many?

by Aaron Levitt | May 8, 2013 7:00 am

iShares ETF Closure: The First of Many?

With 281 different exchange-traded funds, BlackRock’s (NYSE:BLK[1]) iShares line is by far the largest ETF platform available to investors.

Unfortunately, that lineup might be shrinking in the next few years.

For the first time since 2002, Blackrock has decided to shutter one of its funds. While ETF closures and reorganizations[2] happen all the time, this is a rare occurrence for iShares. The closure could have repercussions across iShares’ stable of funds, but at the very least, it definitely serves as a cautionary tale and warning to investors holding some of iShares’ less-popular ETFs.

Managed Futures Are a No-Go

The iShares Diversified Alternatives Trust (NYSE:ALT[3]) was a bit of an anomaly among the rest of the index-tracking ETFs under iShares’ wing.

The actively managed fund was considered to be granddaddy ETF in the managed futures sector. At their core, managed futures strategies take advantage of price trends across a variety of asset classes. Investors employing the tactic can go long or short (or both) various futures contracts in sectors such as commodities, equity indices, foreign currency or even U.S. government bond futures.

The idea is to generate positive and stable returns no matter what the market environment. You’re not looking for home runs, but consistent singles and doubles.

Launched back in 2009, ALT hoped to profit from the mispricing of financial instruments by capturing spreads between assets that deviate from the fair value. The ETF simultaneously enters into long and short positions in various bond, equity, currency and interest rate futures. The ETF was basically split 50/50 long/short among its three target areas — global equities, currencies and bonds.

ALT was somewhat successful at meeting its goal. The ETF did manage to eke out a slight 0.87% return at far lower levels of volatility. However, most professional manage futures funds usually perform in the 3%-to-7% range. So despite being the first fund in a now-popular category, iShares has pulled the plug[4]. After June 4, ALT will be no more.

Overall, iShares blamed the closure on lack of investor interest with Patrick Dunne, BlackRock’s head of Global Markets and Investments. In a statement[5], it said, “iShares continually reviews its product range to ensure it meets the evolving needs of our clients. Based on the review and client feedback, it appears this product has a limited role in today’s investment portfolios, and we have seen little long-term demand.”

Not a Zombie Fund By Far

The interesting thing about ALT’s closure is that the fund was actually kind of popular.

The issuer’s previous closures, back in 2002, were two sector funds that covered chemicals and Internet stocks, as well as a fund linked to the S&P/TSE 60, which tracks Canadian stocks[6]. iShares closed these funds because they were duplicative of other products within the lineup. However, ALT still fills an appealing role for both investors and BlackRock. The ETF was iShares’ only “alternatives” ETF and helped bring manage futures to the average Joe investor.

Even more interesting is the fact that ALT isn’t even iShares “least popular” product.

The fund is closing with roughly $58 million in assets under management. At one point in 2011, as volatility raged, ALT had approached the $150 million mark, though with investors turning back toward stocks, AUM have fallen. Still, of iShares’ 281 exchange-traded funds, 75 have fewer assets than ALT — and 32 of those have less than $10 million in assets.

The general rule has been that small funds usually are given the axe first from sponsoring firms. However, ALT will have a distinction of being the third-largest ETF to ever close. The largest — $600 million PowerShares DB Crude Oil Double Long ETN (DXO) — closed because of a technicality with regards to regulation, not because Invesco (NYSE:IVZ[7]) wanted it to.

More to Come?

With a rather large and somewhat popular first-mover ETF now closing, investors have been wondering what will become of iShares’ fund family. BlackRock declined to comment aside from saying that it continually reviews its product lineup — and that could mean more closures or fund mergers coming to an iShares ETF near you.

Just take a look at the potential funds that could be on the chopping block.

FundTable iShares ETF Closure: The First of Many?[8]

Backing out iShares’ various target-date bond funds — since they have a finite end to them anyway — I think roughly 40 different ETFs could be going the way of the dodo based on AUM and poor trading volumes. Several of them are “duplicates” of other more successful iShares funds and track similar indices. Most of the funds on the list wouldn’t even be missed.

If I was an investor in one of iShares’ low-asset “me too” funds like the iShares MSCI India Small Cap (BZX:SMIN[9]) or incredibly narrow-focused ETFs like iShares MSCI All Country Asia Info Tech (NASDAQ:AAIT[10]), I would be a little worried and perhaps find a better portfolio substitute. Both have less than $10 million in assets — combined.

ETF closures aren’t necessarily the end of the world[11]. But with the shuttering of a market leader and other fund closures a possibility, we could be seeing a shake-up in the industry.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. BLK: http://studio-5.financialcontent.com/investplace/quote?Symbol=BLK
  2. closures and reorganizations: http://investorplace.com/2013/04/snds-switches-focus-completely/
  3. ALT: http://studio-5.financialcontent.com/investplace/quote?Symbol=ALT
  4. iShares has pulled the plug: http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/alt_shareholder_letter_2013.pdf&mimeType=application/pdf
  5. statement: http://finance.yahoo.com/news/alt-shut-1st-ishares-closure-212901316.html
  6. Canadian stocks: http://investorplace.com/2013/05/3-canadian-stocks-worth-buying/
  7. IVZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=IVZ
  8. [Image]: http://investorplace.com/wp-content/uploads/2013/05/FundTable.png
  9. SMIN: http://studio-5.financialcontent.com/investplace/quote?Symbol=SMIN
  10. AAIT: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAIT
  11. ETF closures aren’t necessarily the end of the world: http://investorplace.com/2013/03/oh-no-my-etf-just-closed-now-what/

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