BlackRock Old Chevy ETF Proves Irreplaceable for Traders

Why tote around a first-generation iPhone when you have a 5s at home? Or drive a beat-up old Chevy when there’s a new Corvette in the garage? In the world of exchange-traded funds, that’s just what investors are doing.

BlackRock Inc.’s iShares Core MSCI Emerging Markets ETF (IEMG), rolled out in late 2012, is superior in almost every way to its decade-old predecessor, the iShares MSCI Emerging Markets fund. And yet no ETF in the world has lured more money since the first quarter than the veteran product, about $7 billion in all.

Far from dumping dated ETFs for newer versions that are cheaper and often track a broader range of securities, Wall Street traders are proving there’s one measure they care about more than any other when it comes to these products: liquidity, and lots of it. And that’s fine with BlackRock, which is looking to compete with the likes of Vanguard Group Inc. and Charles Schwab Corp. for individual investors who want low fees without cannibalizing its most profitable exchange-traded funds.

“It’s all about comfort, and there’s a lot of comfort that comes with names that are trading with the kind of volume and breadth of ownership of EEM,” Chris Hempstead, the head of ETF sales at KCG Holdings Inc. in Jersey City, New Jersey, said in a July 15 interview. EEM is the ticker of BlackRock’s $42 billion emerging-market fund, now the seventh-largest in the world. “People don’t want to have to think too hard about which emerging-market product to choose. They don’t want to have to worry a lot about what they’re getting in to.”

Vanguard’s Cheaper

Developing-nation ETF trading volume has surged to the highest since 2010 in the past year amid investor concern over the end of easy-money policies from central banks and financial instability from Argentina to Turkey. The popularity of the established products shows how money managers are prioritizing ease of access over price and innovation when seeking exposure to economies with attractive growth trends while trying to navigate rising geopolitical tension from Russia to the Middle East.

About 37 million shares, or $1.6 billion, of the older BlackRock Emerging Markets ETF changed hands daily over the last 30 days, fourth-most among exchange-traded products globally. That’s more volume than on any U.S. company besides Apple Inc., and almost 50 times that of its newer counterpart, which has about $5.3 billion in assets.

It’s also more than three times the volume of Vanguard’s FTSE Emerging Markets ETF (VWO), whose expense ratio, like the iShares Core MSCI Emerging Markets ETF, is about a quarter the 0.67 percent fee of BlackRock’s flagship fund.

Vanguard’s $49 billion ETF, the fourth-largest in the world, has attracted $2 billion of inflows since March.

State Street

The MSCI Emerging Markets Index added 0.1 percent to 1,079.57 at 2:52 p.m. in New York.

It’s not just in emerging markets where liquidity is paramount. Traders turned to State Street Corp.’s $169 billion SPDR S&P 500 ETF Trust (SPY) when they wanted to pile $4.2 billion back into U.S. stocks in the three months through June, lured by average daily volume of $17.4 billion. Cheaper challengers from BlackRock and Vanguard with a fraction of the trading garnered about half the inflows.

And BlackRock’s $6.9 billion iShares Gold Trust (IAU) hasn’t been able to dislodge State Street’s more liquid $34 billion SPDR Gold Shares ETF among traders, despite charging about half as much for management.

Different Customers

BlackRock’s developing-nation products, including the iShares MSCI Emerging Markets Minimum Volatility fund, are designed to target distinct ETF users, according to Daniel Gamba, the head of the New York-based company’s institutional exchange-traded fund business in the Americas.

“Each of these products serves a different clientele,” Gamba said in a July 15 telephone interview. “EEM is really directed toward the high frequency, more experienced user of ETFs. We have seen very little evidence of cannibalization.”

Lower execution costs are also prompting tactical traders who enter and exit bets frequently to favor funds with higher volume, according to Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ.

BlackRock’s newer emerging-market ETF has an average bid-ask spread of 2.8 basis points, compared with 2.3 for that of its larger predecessor.

“It’s not just the expense ratio that’s important, but other cost factors that are playing a role for investors,” Rosenbluth said in a July 14 phone interview from New York. “The bid-ask spread is tighter for EEM, which is important if your time horizon is short and you’re trading in and out of the ETF.”

Familiarity with the product and convenience also play a role for investors, he said.

Implied Liquidity

While there’s a tendency for investors to equate liquidity with volume, it’s a misconception that they always need to be in the most traded products to have the ability to enter and exit large positions, according to Michael Gayed, the chief investment strategist who helps manage $220 million at Pension Partners LLC in New York.

The newer iShares Core MSCI Emerging Markets fund has an average 30-day volume of 655,000 shares, or $34.4 million. Meanwhile its implied liquidity of 4.7 million shares indicates the ETF basket could trade more than $250 million of notional value daily, according to data compiled by Bloomberg.

Implied liquidity represents the number of ETF shares that could potentially be traded as indicated by the volume of each component in its holdings.

Market Inefficiency

“This is a classic example of individual behavior that causes inefficiency in the marketplace,” Gayed said in a telephone interview. “People are paying more for the same result. EEM has become somewhat of a brand for emerging markets.”

That brand means established ETFs won’t be fading away anytime soon, according to KCG’s Hempstead.

While the core fund, which hasn’t had a single day of outflows since it began trading in October 2012, is attracting individual and long-term investors, the veteran BlackRock ETF continues to lure institutional asset managers and traders seeking to execute larger transactions without drawing market attention.

“The first mover advantage has been phenomenal,” Hempstead said. “These are just the most popular funds in the room. They were the first to market, and as long as they don’t change materially, there’ll always be that core group of investors that want to own it.”

To contact the reporter on this story: Boris Korby in New York at bkorby1@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net

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