Buying and selling individual stocks or actively managed mutual funds that charge big fees is so 20th century.
These days, more and more people prefer cheaper exchange-traded funds — passive investments that often track top indexes like the S&P 500 and Nasdaq.
That’s fantastic news for BlackRock, the giant New York investment firm that owns the iShares family of ETFs.
BlackRock said in its fourth quarter earnings report Friday that more than $245 billion flowed into its iShares funds in 2017.
The iShares ETFs now manage a whopping $1.75 trillion in assets. That is nearly 40% of the entire industry, according to research firm ETFGI.
Mutual funds are still a bigger business than ETFs, with $16.3 trillion in assets invested, according to the Investment Company Institute.
But a growing number of funds favor passive index strategies over stock picking. What’s more, ETFs are clearly eating into the popularity of mutual funds. ICI says investors have withdrawn money from mutual funds for the past two years.
And the strength of iShares helped BlackRock report earnings and revenue that topped Wall Street’s forecasts, pushing shares of BlackRock up 3%. The stock is already up 8% this year, following a 35% gain in 2017.
“BlackRock is the poster child for success in the ETF business,” said Mike Venuto, chief investment officer of Toroso Investments, which runs the ETF Industry Exposure & Financial Services ETF — an ETF that invests in companies with big ETF businesses.
Yes, I realize how meta that sounds. But Venuto said the fund is a way to capitalize on the surge in demand for ETFs. The fund owns shares in BlackRock as well as other big ETF players like State Street, S&P Global and Charles Schwab.
Venuto singled out BlackRock in particular as one of the more innovative players in the ETF industries. It constantly comes up with products to cater to investors looking for different types of market strategies.
One example he noted: So-called smart beta ETFs — which are a mix of passive and active investing strategies. They typically take an index fund and change the weighting of the companies in it so they are not ranked just by how big their market values are.
So a fund could offer more exposure to companies with higher dividends, better sales growth or cheaper valuations, for example, instead of ranking them by size. That could allow the fund to outperform the market instead of just tracking it.
During a conference call with investors, BlackRock CEO Larry Fink noted that iShares already has more than 100 smart beta ETFs — and more are on the way.
“This is a market that really is still in the early stages, and every day we have another client that comes in and finds another use for it,” Fink said. “So I’m just very optimistic on using this as a tool to help clients make better portfolios.”
Fink also addressed the red-hot stock market and concerns that it might be getting a little frothy because of optimism about the new tax law. He admitted that “we still see high anxiety” and that some investors are growing more cautious and less willing to take on risk.
But Fink stressed the importance of staying in the market instead of trying to bet on when the next crash will take place.
“There is an even greater need to focus on investing in the long run,” he said. “An individual with $1,000 in 1950 would have around $20,000 today if they saved in a U.S. bank account versus $1 million if they invested in the S&P in 1950.”
Of course, BlackRock is positioned for all types of market environments. A quick look at the iShares web site shows there are 86 bond ETFs and a dozen funds that the company describes as “minimum volatility.” Different strokes for different folks, I guess.
