Why Is BlackRock Closing 16 Of Its U.S.-Listed iShares Offerings?

by Trefis Team
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BlackRock recently announced plans to close and liquidate 16 of its U.S.-listed iShares ETFs (exchange-traded funds), in what looks like a step by the asset management giant towards reducing overall operating costs even as it turns to the retail investor segment for long-term growth. The 16 ETFs being shuttered by BlackRock include less popular and under-performing offerings – with a majority of them being smart-beta ETFs which were extremely popular in 2015, but never quite lived up to their hype.

Taken together, these 16 funds manage about $90 million in total assets – a negligible portion of the $1.7 trillion in total assets under management across BlackRock’s 800 iShares offerings globally. However, by closing these funds BlackRock can divert more resources towards offering more popular ETFs to investors. This could have a positive impact on BlackRock’s margins in the near term – which should in turn help the company’s earnings.

We capture the impact of changes in operating margin on BlackRock’s share price in detail in our interactive dashboard for the company. You can modify assumptions such as earnings multiples, expected revenues and effective tax rate, among others, to see how sensitive BlackRock’s shares are to its operating margin.

The Global ETF Industry, And BlackRock’s Long-Term Growth Strategy

The popularity of ETFs and other exchange-traded products (ETPs) is demonstrated by the fact that the industry has grown to over $5 trillion in total assets currently, from being a largely obscure investment option at the turn of the century. [1] The reason for this growth is that ETFs provide investors a cheap and convenient way to put their money into fixed income, equity, currency, commodities and other investment markets. And with the popularity really only skyrocketing in the past few years, the industry has the potential to continue to grow considerably in the future.

The largest avenue of growth for ETF providers over the coming years is expected to be the retail investor market, which remains underserved. As retail investors are much more sensitive to expense ratios, asset managers have been trying to attract them with a string of low-cost ETFs. This, in turn, has triggered a price war among incumbents in the ETF industry – largely thanks to the popularity of low-cost, core ETFs from Vanguard. While BlackRock is the market leader in the ETF industry, Vanguard has seen the best growth globally among retail investors of late, thanks to the proven track record of its low-cost ETF lineup.

While the retail investor segment holds immense growth potential, the cost-sensitive nature of retail investors and the ongoing price war has reduced profit margins in the industry to extremely low levels. It is, therefore, no surprise that asset managers have worked on ways to slash operating costs to ensure that their margins do not decline drastically as they continue to add more retail ETFs to their lineup. This is where efforts like BlackRock’s recently announced plans to shutter 16 iShares ETFs come in.

Understanding The Impact Of Changes In Operating Margin on BlackRock’s Share Price

While the iShares being liquidated manage a very small portion of BlackRock’s total assets, their closure is likely to have a positive impact on the company’s operating costs. As we detail below, an increase in BlackRock’s operating margin by 1 percentage point (p.p.) represents a sizable upside to its valuation:

  • Starting with our estimate of $14.9 billion in full-year revenues for BlackRock in 2018, a 1 p.p. increase in operating margin should increase pre-tax profits by ~$150 million

  • Assuming that BlackRock’s effective tax rate for the year is 20%, and that the average number of shares outstanding for the year is 160 million, the $150 million increase in profit translates into an increase in BlackRock’s EPS by 74 cents.

Using BlackRock’s current forward P/E ratio of 19, the 74 cents in higher EPS will drive an increase in share price of $14. This represents an upside of almost 3% to BlackRock’s share price of ~$520 purely from a 1% increase in its operating margin.

If you disagree with any part of our analysis, you can create your own model by making changes on our dashboard.

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Notes:
  1. Global ETF and ETP Assets, ETFGI Website []
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