BlackRock planning active US sector ETFs

Nov 22nd, 2017 | By | Category: Equities

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The world’s largest ETF provider, BlackRock, is planning to launch a number of active US equity sector ETFs managed by sophisticated algorithms, marking a change of direction for a company that has forged its dominant position in the ETF market with index-tracking products. Filings with the Securities and Exchange Commission (SEC) reveal the funds will be launched under the name ‘iShares Evolved’ and will each give exposure to one of seven sectors.

BlackRock planning active US sector ETFs

The algorithms have identified 12 sectors, the constituents of which are expected to evolve dynamically to reflect changes in business models.

The newly created ‘Evolved Sectors’ classification system has been designed by “machine learning, natural language processing and clustering algorithms” to analyse each company’s related data, including regulatory filings and quarterly reports. Companies can be assigned to more than one sector and BlackRock expects sector constituents to evolve dynamically over time to reflect changing business models.

So far, the computers have identified 12 sectors: consumer staples, discretionary spending, energy, healthcare staples, financials, industrials, innovative healthcare, media & entertainment, real estate, technology, telecommunications, and utilities.

MSCI and S&P Dow Jones Indices recently announced a major shake-up of the Global Industry Classification Standard (GICS) that will see many tech stocks moved to the new communications services sector (see: Sector ETFs set to be impacted by changes to GICS). However, companies must still reside in only one sector, which makes classification of companies such as Amazon, which provides retail, video and cloud computing services, an inexact science. Allowing companies to exist in more than one sector is one step that may help address this concern.

As the passive ETF market looks increasingly saturated, BlackRock appears to be looking to active ETFs as the next frontier for growth opportunities. Despite its small size compared to the overall industry, the active ETF segment is booming, with assets up 45% so far in 2017 (see: Actively managed ETF AUM up 45% YTD).

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