BlackRock’s iShares exchange-traded funds business is launching a campaign to assist investors in 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 USD632bn in new assets flowing into ETFs in nearly the past five years alone. During that time, 32 new ETF providers have entered the market and 839 new ETFs have been launched.
Noel Archard, head of US iShares product at BlackRock, says: "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."
The Investor ETF Checklist 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, standalone 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.
