It’s not uncommon for the sponsors of various exchange traded funds (ETFs) to close or change around underperforming funds. Not everyone needs a triple-leveraged ETF that tracks South Korean stocks.
A healthy closure process is part of natural evolution of ETFs acceptance by both retail and institutional investors. But generally, ETF closures mostly center around smaller and niche players in the ETF world.
So when a giant like BlackRock’s (BLK) iShares makes some large moves on the closure front, it actually can affect a multitude of investors. Well, iShares is doing just that as well as changing around several all-star funds.
For investors owning or considering these funds, the time to get out or reconsider is now.
Eighteen Fewer iShares ETFs
The cool thing about iShares ETF product line is the sheer number of funds. The brand features the largest number of individual ETFs — tracking everything from the super-broad bread-and-butter indexes to niche offerings. Currently, the number of iShares ETFs stand at just around 300. Unfortunately, not everything sticks with investors — even some good ideas.
With that in mind, Blackrock has decided to jettison 18 of its iShares ETFs and revamp four funds to track a few different indexes.
The closures come as a bit of a shock to ETF sector followers. iShares typically hasn’t done many fund closures in its history and this is the first batch of closures since 2013. What’s going is a mixture of international stock, real estate and sector bond ETFs. Collectively, the iShares ETFs that are going only held about $227 million worth of assets.
The last day for the iShares ETFs to trade will be Aug 24. Here’s the list of closed funds.
- iShares MSCI EM Eastern Europe (ESR)
- iShares FTSE China (FCHI)
- iShares MSCI AC Asia ex Japan Small Cap (AXJS)
- iShares MSCI Australia Small Cap (EWAS)
- iShares MSCI Canada Small Cap (EWCS)
- iShares MSCI Hong Kong Small Cap (EWHS)
- iShares MSCI Singapore Small Cap (EWSS)
- iShares MSCI Emerging Markets EMEA (EEME)
- iShares MSCI Emerging Markets Growth (EGRW)
- iShares MSCI Emerging Markets Value (EVAL)
- iShares MSCI AC Asia Info Technology (AAIT)
- iShares MSCI EM Cons. Discretionary (EMDI)
- iShares MSCI EM Energy Capped (EMEY)
- iShares Asia Developed Real Estate (IFAS)
- iShares North America Real Estate (IFNA)
- iShares Financials Bond (MONY)
- iShares Industrials Bond (ENGN)
- iShares Utilities Bond (AMPS)
As you can see, most of these closures make sense. No one really needs an ETF that bets on small caps in Singapore. However, a few of the launches actually leave real holes in the ETF landscape.
For example, the iShares bond ETF trio of MONY, ENGN and AMPS were the first and only funds to bet on sector segments of the fixed income market. And given their yields, I’m actually surprised that investors didn’t jump on board. Their closure comes at a time when investors are still looking for income in a low-interest rate environment.
The biggest loss comes on the emerging market side of things. EEME was the only ETF to bet on the Europe, the Middle East and African areas of the developing world. The problem is that most emerging market indexes focus heavily on Asia and Latin America. The iShares ETF was an easy “shore-up” a portfolio’s exposure to the other regions.
Likewise, both EVAL and EGRW were the only funds to dice up the emerging market world into “value” and “growth” investment styles.
The Four ‘New’ iShares ETFs
In addition to the 18 closures, iShares has decided to reconfigure four of its ETFs. That’s actually kind of weird considering that the four iShares ETFs are actually pretty successful and popular products with investors.
The iShares MSCI USA Quality Factor ETF (QUAL), iShares MSCI USA Value Weighted Index Fund (VLUE), iShares MSCI USA (EUSA) and iShares Japan Large-Cap ETF (ITF) will all get new indexes, but keep their existing tickers on Aug. 31.
Both the $1 billion QUAL & $701 million VLUE will keep their smart-beta twists and use a different set of screens to isolate “quality” and “pure-value” stocks. Basically, they’ll be the same ETFs with the same underlying investment objectives. This is a just a change of the underlying MSCI smart-beta indexes the ETFs use. The idea is that the new indexes/set of screens will help the funds achieve their goals better.
For both EUSA and ITF, it’s a completely different ballgame. EUSA will go from tracking MSCI USA Index — which is a measure of all stocks in the United States — to one that it equal weighted. That’s a huge difference and could mean extra returns for investors.
There’s plenty of evidence that shows that equal-weighting is the way to go.
ITF has always been the stepchild of the Japanese ETFs and never really catching on with investors. The ETFs previous index was a narrow measure of large cap-only stocks in the developed market. ITF will now follow the broad JPX-Nikkei Index 400. The Nikkei is one of the main stock market indexes in Japan. Hopefully, the new mandate will attract more investor attention to the iShares ETF.
The Bottom Line
Fund closures are a natural part of ETF growth and BlackRock’s decision to revamp its iShares ETFs line is just part of that process. What is unfortunate is that several of the now closed funds were actually quite innovative. Investors will now be left with less tools to complete their portfolios.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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