Institutions are increasingly using Exchange Traded Funds (ETFs) as
precision investment tools to access new investment opportunities with
simple and efficient trades that would not have been previously
considered or possible. To demonstrate the new ways ETFs are being used
by institutional investors, the iShares Institutional team at BlackRock
(NYSE: BLK) offers three case studies: Glovista Investments getting
exposure to “illiquid” Frontier Markets, Laffer Investments accessing
unexpected liquidity from a new ETF, and an insurance company improving
operational efficiency in smaller portfolios.
Daniel Gamba, Head of Americas iShares Institutional Business at
BlackRock, said: “Institutional investors today are looking for
investment solutions that use iShares ETFs in innovative and new ways to
get targeted, bespoke investments with efficiency and simplicity. To
ensure a positive ETF investing experience, we take a holistic,
soup-to-nuts approach to helping our clients determine the best
portfolio solutions and trade execution strategies. This consultative
approach yields new solutions that neither the client nor we would have
considered individually. And, as a result, the list of ETF uses among
different institutions keeps growing.”
iShares Institutional client team, along with the iShares capital
markets specialists, the largest ETF capital markets group in the
industry, listens to understand each client’s challenge and then
provides the client with pre- and post-trade analyses. They also work
with market makers, Authorized Participants and exchanges to help the
client tap into ample liquidity and achieve the most economic execution.
Case Study #1: ETFs Providing Access to “Illiquid Frontier” Markets
Client Challenge
Glovista Investments LLC, an investment advisory firm and global macro
manager with $900 million in AUM primarily for institutions, is
well-known for its flagship Emerging Markets Equity Strategy. Their
strategy utilizes ETFs to access single Emerging Markets countries and
has the ability to allocate up to 10% of the portfolio to non-benchmark
opportunistic positions. Earlier in the year, Glovista was interested in
making a tactical bet in Frontier Markets because of their attractive
valuation and positive earnings outlook at the time, and their belief
that their Emerging Markets Strategy would benefit from short-term
exposure to the higher beta of Frontier Markets.
Frontier Markets can be very illiquid and difficult to access
efficiently especially when a manager wants to take a short-term
position. The costs of trading in and out can become very costly with
investments in underlying securities. Glovista looked for a solution
that would allow opportunistic exposure to Frontier Markets in a liquid
instrument and at a reasonable spread level.
Solution
Glovista selected the iShares MSCI Frontier 100 ETF (NYSEArca: FM) that
provides exposure to 100 of the largest and most liquid stocks in
Frontier Markets. Launched in September 2012, FM has over $800 million
in AUM and is the only ETF listed in the U.S. that provides pure
exposure to companies domiciled in frontier countries such as Kuwait,
Nigeria, Pakistan, among others.
Glovista worked through their broker on one large block trade of $10
million and the position was executed inside the offer with minimal
impact. The liquidity of the ETF, in combination with willingness of
market makers to make risk markets, made a trade of this size possible
in one large block trade so Glovista could efficiently act on its
convictions.
Darshan Bhatt, CFA, Co-Founder and Co-Portfolio Manager of Glovista
Investments, said: “When institutions typically think of Emerging
Markets or Frontier Markets, they wonder if, how and at what cost they
can efficiently access these markets. We inform our clients that ETFs
provide us an efficient vehicle to access exposure to specific Emerging
and Frontier Markets. The transaction costs and bid-ask spreads of ETFs
are much more cost-effective than trading the underlying securities or
ADRs. The trade in FM is a good example of how iShares ETFs meet the
criteria for pure access through well-recognized indexes and sufficient
liquidity levels and how by working with iShares on trading analyses we
can deliver best value to our clients.”
Case Study #2: Accessing Unexpected Liquidity from a New ETF
Client Challenge
Laffer Investments, an asset manager with $732 million assets under
management (AUM) that manages global asset allocation strategies, as
well as provides macroeconomic investment research with its affiliated
Laffer Associates, wanted to gain exposure to specific parts of Europe
and had particular interest in accessing Germany and hedging its
currency at the same time.
The challenge was that among the various precision instruments to
orchestrate a Germany hedged position, Laffer considered the iShares
Currency Hedged MSCI Germany ETF (NYSEArca: HEWG), but the size of the
new ETF launched in February 2014, was small at approximately $2.5
million. Laffer was contemplating an allocation of $40 million, which
would represent 1020% of the fund’s average daily dollar volume and
1580% of the fund’s total AUM.
Solution
It is common for institutional investors to be interested in investing
in a new ETF, but the ETF typically needs time to grow before it has
enough size and secondary liquidity. While developing HEWG, iShares
recognized the immediate interest large investors would have in the
product, so they designed HEWG to invest in the unhedged iShares MSCI
Germany ETF (NYSEARca: EWG) and implement foreign currency forward
contracts as the hedge.
iShares provided Laffer with pre-trade analysis to show that a trade in
HEWG could benefit from EWG’s liquidity and average daily dollar volume
of over $100 million. Laffer decided to place one large block trade with
a limit order through their broker and the position was executed at the
offer with minimal impact. The bid/ask spread of HEWG was 3 cents wide
(12bps) and the bid/ask spread of EWG was 1 cent wide (3bps) at the time
of execution.
The liquidity of the underlying basket made a sizeable, one block trade
possible, enabling Laffer Investments to quickly act and invest on its
views about Germany.
Case Study 3: ETFs Improving Operational Efficiency in Smaller
Portfolios
Client Challenge
A mid-sized insurance company with $5 billion in assets had several
subsidiary portfolios with assets $30 to $60 million. The company was
looking for a way to transition these portfolios out of cash with the
goal of meeting the investment and yield objectives of each entity, but
wanted to do so in an operationally viable and cost efficient way.
The challenge the client was facing is quite common. Many insurers are
required to maintain small sub-portfolios matched to specific lines of
business or liabilities. Typically they are holding a small
undiversified portfolio of single bonds or cash that often do not match
the company’s investment policy.
Solution
Many insurance companies are starting to utilize ETFs to provide
operational efficiency, portfolio diversification and a better
investment result, allowing investment staff to increase focus on the
larger general account.
BlackRock’s iShares team worked with the client to identify which ETFs
would match the client’s asset allocation needs and objectives of each
subsidiary entity. The client invested in the iShares MBS ETF (NYSEArca:
MBB), iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG),
iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), and
iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), executing
trades of $3 million - $25 million in size over several days with
minimal market impact. This ETF solution significantly reduced
transaction costs versus trading the cash bonds and it also provided
on-exchange trading simplicity and liquidity.
Daniel Gamba concluded, “As we educate investors about ETFs and
they share with us their portfolio challenges, together we can find a
cost-effective, efficient solution. After solving one problem, often ‘a
light goes on’ in the clients’ minds on how ETFs can simplify other
portfolio management issues. Thus, the number of ETF uses appears
boundless.”
About BlackRock
BlackRock is a leader in investment management, risk management and
advisory services for institutional and retail clients worldwide. At
June 30, 2014, BlackRock’s AUM was $4.594 trillion. BlackRock helps
clients meet their goals and overcome challenges with a range of
products that include separate accounts, mutual funds, iShares®
(exchange-traded funds), and other pooled investment vehicles. BlackRock
also offers risk management, advisory and enterprise investment system
services to a broad base of institutional investors through BlackRock
Solutions®. Headquartered in New York City, as of June 30, 2014, the
firm had approximately 11,600 employees in more than 30 countries and a
major presence in key global markets, including North and South America,
Europe, Asia, Australia and the Middle East and Africa.
For additional information, please visit the Company’s website at www.blackrock.com
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About iShares
iShares is a global product leader in exchange traded funds with over
600 funds globally across equities, fixed income and commodities, which
trade on 20 exchanges worldwide. The iShares Funds are bought and sold
like common stocks on securities exchanges. The iShares Funds are
attractive to many individual and institutional investors and financial
intermediaries because of their relative low cost and trading
flexibility. Investors can purchase and sell shares through any
brokerage firm, financial advisor, or online broker, and hold the funds
in any type of brokerage account. The iShares customer base consists of
the institutional segment of pension plans and fund managers, as well as
the retail segment of financial advisors and high net worth individuals.
Carefully consider the iShares Funds’ investment objectives, risk
factors, and charges and expenses before investing. This and other
information can be found in the Funds’ prospectuses, which may be
obtained by calling 1-800-iShares (1-800-474-2737) or by visiting www.iShares.com.
Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal. International
investing involves risks, including risks related to foreign currency,
limited liquidity, less government regulation and the possibility of
substantial volatility due to adverse political, economic or other
developments. These risks often are heightened for investments in
emerging/ developing markets or in concentrations of single countries.
Frontier markets involve heightened risks related to the same factors
and may be subject to a greater risk of loss than investments in more
developed and emerging markets. Investment in the iShares Currency
Hedged MSCI Germany ETF (HEWG) is subject to the risks of the underlying
Funds. HEWG's use of derivatives may reduce the Fund's returns and/or
increase volatility and subject the Fund to counterparty risk, which is
the risk that the other party in the transaction will not fulfill its
contractual obligation. The Fund could suffer losses related to its
derivative positions because of a possible lack of liquidity in the
secondary market and as a result of unanticipated market movements,
which losses are potentially unlimited. There can be no assurance that
the Fund's hedging transactions will be effective.
Fixed income risks include interest-rate and credit risk. Typically,
when interest rates rise, there is a corresponding decline in bond
values. Credit risk refers to the possibility that the bond issuer will
not be able to make principal and interest payments.
Non-investment-grade debt securities (high-yield/junk bonds) may be
subject to greater market fluctuations, risk of default or loss of
income and principal than higher-rated securities.
There may be less information on the financial condition of municipal
issuers than for public corporations. The market for municipal bonds may
be less liquid than for taxable bonds. Some investors may be subject to
federal or state income taxes or the Alternative Minimum Tax (AMT).
Capital gains distributions, if any, are taxable. Mortgage-backed
securities ("MBS") and commercial mortgage-backed securities ("CMBS")
are subject to prepayment and extension risk and therefore react
differently to changes in interest rates than other bonds. Small
movements in interest rates may quickly and significantly reduce the
value of certain mortgage-backed securities.
Transactions in shares of the iShares Funds will result in brokerage
commissions and will generate tax consequences. iShares Funds are
obliged to distribute portfolio gains to shareholders. Shares of the
iShares Funds may be sold throughout the day on the exchange through any
brokerage account. However, shares may only be redeemed directly from a
Fund by Authorized Participants, in very large creation/redemption units.
The iShares Funds are distributed by BlackRock Investments, LLC
(together with its affiliates, “BlackRock”).
The iShares Funds are not sponsored, endorsed, issued, sold or promoted
by MSCI Inc. nor does this company make any representation regarding the
advisability of investing in the Funds. BlackRock is not affiliated with
the companies listed above.
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registered trademarks of BlackRock. All other marks are those of their
respective owners. iS-13380-0914
Copyright Business Wire 2014