iShares showcases three case studies on how to use ETFs as precision investment tools

SAN FRANCISCO, Sep 11, 2014 (BUSINESS WIRE) — 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 BLK, -0.26% 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.

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.

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.

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.

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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SOURCE: iShares

iShares

Christine Hudacko, 415-670-2687