BlackRock’s Currency ETF Struggle Flags Unconquered Niche

  • World’s largest asset manager has no foreign-exchange funds
  • Currency ETF assets total $3 billion in $2.5 trillion market

You know a market’s tough to crack when the world’s largest asset manager says it’s struggling to gain traction.

BlackRock Inc.’s efforts to sell exchange-traded funds focused on currencies have failed due to a lack of institutional interest, according to Mark Wiedman, global head of the company’s iShares ETF business and of index investments. That’s because while retail investors get hit by fees or embedded spreads when they trade currencies, professionals can move millions for less than a basis-point cost. Yet ETFs need institutional use to thrive.

Foreign exchange is rapidly becoming the final frontier within the $2.5 trillion market for U.S. ETFs. While equity, debt and even commodity funds have proliferated, repackaging currencies into an easily tradable equity-based product has proved challenging. Just 23 of more than 1,750 funds that trade in the U.S. focus on currencies, managing just $3 billion together, according to data compiled by Bloomberg. BlackRock has none.

Foreign exchange is “one of the massive unconquered markets,” said Wiedman, speaking at a Bloomberg conference in New York on Thursday. “We have experimented unsuccessfully to create FX vehicles,” he said. “We just haven’t figured out how to basically jump-start the liquidity.”

Volatility Returns

That’s despite a rise in currency volatility over the last month. The dollar jumped the most in two decades against the yen in November following Donald Trump’s election victory and before the Federal Reserve meets to consider raising interest rates later this month.

Last year, more than $46 billion flowed into ETFs that aimed to hedge the impact of currency fluctuations on returns from overseas assets. Those funds have lost traction this year, losing $22 billion to redemptions.

“Currency ETFs have largely failed to gather assets because the FX market is something most institutions are used to accessing directly, and for the faction of retail investors who do care about managing FX exposure, they have been opting to use a currency-hedged ETF,” said Eric Balchunas, an ETF analyst for Bloomberg Intelligence. “That said, BlackRock is arguably the one issuer who could bring the currency ETF category out of oblivion.”

— With assistance by Lananh Nguyen

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