TL;DR Breakdown
- BlackRock has entered the US buffered ETF market with two funds, sparking a price war due to their lower annual fees.
- The popularity of buffered ETFs rose during market turbulence, drawing $11.1bn inflows last year, and continues to attract funds in calmer times.
- With the entry of BlackRock and its competitive pricing, industry experts predict a significant shift in pricing dynamics of the buffered ETF sector.
Description
Opening up the frontline of a fierce financial battle, BlackRock’s strategic leap into the US buffered exchange-traded fund (ETF) realm has begun to intensify the competition on pricing. The financial titan introduced two ETFs, specifically designed to provide investors a safety net against market downturns, fundamentally reshaping the competitive landscape and pressuring competitors to rethink … Read more
Opening up the frontline of a fierce financial battle, BlackRock’s strategic leap into the US buffered exchange-traded fund (ETF) realm has begun to intensify the competition on pricing.
The financial titan introduced two ETFs, specifically designed to provide investors a safety net against market downturns, fundamentally reshaping the competitive landscape and pressuring competitors to rethink their pricing strategies.
BlackRock’s tactical entry into the buffered ETF arena
Buffered ETFs in the US, known for their annual fee structure ranging from 75-85 basis points, witnessed a considerable surge in popularity during the rollercoaster market conditions of the previous year.
These financial vehicles, designed to offer some downside protection via derivatives, are essentially an insurance policy against market declines. However, they also limit the upside, requiring investors to sacrifice a portion of their gains if the market ascends.
The allure of such financial instruments was demonstrated by their robust inflows, reaching $11.1 billion amid the market turbulence last year, up from the previous record of $4.3 billion in 2021, as per FactSet’s data.
These inflows remained resilient even in calmer trading times, attracting a further $4.6 billion to date this year.
Breaking into this growing sector, BlackRock has launched two distinctive offerings – the iShares Large Cap Moderate Buffer ETF (IVVM) and the iShares Large Cap Deep Buffer ETF (IVVB).
In a disruptive move to the sector’s pricing model, BlackRock has priced these offerings at an annual fee of just 50 basis points each, posing a serious challenge to its rivals.
Impact and implications of BlackRock’s competitive pricing
BlackRock’s aggressive pricing strategy is a seismic event in the buffered ETF landscape. Industry experts, like Nate Geraci, president of the ETF Store, believe the firm’s entry into this thriving market could spark a significant shift in the pricing dynamics.
In his view, BlackRock’s lower pricing will pressurize the entire buffered ETF industry, potentially bringing the long-term average fees below 40 basis points.
The buffered ETF sector in the US is currently dominated by five major providers. Innovator Capital Management, with about $13 billion in assets under management (AUM), is at the helm, closely trailed by First Trust with $12.8 billion AUM.
Their closest competition, Allianz, manages only $1.3 billion. However, the fast-growing nature of this category, as evident by a rise to $28 billion in assets across 188 buffered ETFs in the US, up from 170 ETFs with $21 billion in assets at the end of 2022, underscores the vast potential this sector holds for BlackRock.
Despite the pricing disruptions initiated by BlackRock’s entry, Elisabeth Kashner, director of global fund analytics at FactSet, highlights that the most significant cost to buffered ETF investors isn’t the expense ratio but the foregone dividend.
Investors in BlackRock’s buffered ETFs won’t receive regular dividend income, unlike those investing in the iShares Core S&P 500 ETF (IVV).
Geraci emphasizes that the most profound implications of BlackRock’s foray into the buffered ETF market will be felt by banks and insurance companies, which traditionally offer structured products similar to buffered ETFs.
The introduction of BlackRock’s buffered ETFs, with their appealing features and lower fees, could attract market share away from traditional structured products, characterized by their opaque structures, illiquidity, and higher fees.
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