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Video 3:40

iSHARES BUILDS ETFs WITH TAXES IN MIND

Amy Whitelaw, Head of Americas iShares ETF Portfolio Engineering, discusses iShares’ differentiated approach to building tax-efficient ETFs.

What does it mean to be tax efficient?

 

For us at BlackRock, being tax efficient is managing portfolios in a manner in which we seek to minimize capital gain distributions from the fund. We deeply understand the need for growth in a client’s portfolio and the importance of minimizing the commensurate capital gain distributions, and therefore the tax drag of an investment is more in control of the investor, in other words, when they buy and sell a fund.

Tax Efficiency also means trying to maximize qualified income where appropriate.

 

What’s behind ETF’s tax efficiency?

 

There are three levels that makes our iShares ETFs tax efficient.

 

The first level is aligned with indexing as a strategy. The vast majority of iShares ETFs are index strategies, which generally speaking has lower turnover.

 

The next level is the structure of ETFs. ETFs are bought and sold on the exchange between buyers and sellers. In other words, investors in the fund are insulated. In the case where buyers and sellers are not in equilibrium, new shares are create or redeemed, generally using an in-kind process. This in-kind mechanism mitigates the buying and selling within the fund potentially reducing taxable events.

 

The last level comes down to what my teams does, manage our funds with a hyper focus on tax efficiency.

 

How does iShares build their ETFs with tax efficiency in mind?

 

From a philosophy prospective, tax efficiency is a continuous focus for us. It starts on January 1 and ends December 31st and continues year over year.  Since we launched the first iShares ETF almost 20 years ago, it’s been a true commitment to manage our portfolios to maximize after tax returns for investors. And the results speak volumes. 94% of our ETFs have not distributed a capital gain over the past 5 years.

 

From a process standpoint, when it comes to managing our ETFs, there are a few areas where I’d argue we have a differentiated and sharp focus.

 

First, our tax lot management leverages real time data and is fully incorporated into an end to end investment process which enables us to effectively manage tax lots to the best extent possible. Second, we proactively use the ability to bank loss losses through tax loss harvesting and have an integrated tool that helps us optimize events such as index rebalances to capitalize on this benefit. Third, we also leverage the ETF structure and the in-kind process to effectively externalize buying and selling activity to further drive tax efficiency.

 

Underpinning our philosophy and process is team of experienced portfolio managers who leverage the scale of BlackRock’s platform at the intersection of our proprietary Aladdin technology. It’s our people, scale and technology that help drive our tax efficiency.

 

Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. 

 

Past distributions are not indicative of future distributions.

 

Visit www.iShares.com to view a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal.

 

iShares Funds are obliged to distribute portfolio gains to shareholders by year-end. These gains may be generated due to index rebalancing or to meet diversification requirements. Trading shares of the iShares Funds will also generate tax consequences and transaction expenses.

 

This material is provided for educational purposes only and does not constitute investment advice. The information contained herein is based on current tax laws, which may change in the future. BlackRock cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this video or from any other source mentioned. The information provided in this material does not constitute any specific legal, tax or accounting advice. Please consult with qualified professionals for this type of advice.

 

Shares of iShares ETFs may be bought and sold throughout the day on the exchange through any brokerage account.  Shares are not individually redeemable from the ETF, however, shares may be redeemed directly from an ETF by Authorized Participants, in very large creation/redemption units. Although market makers will generally take advantage of differences between the NAV and the trading price of iShares ETF shares through arbitrage opportunities, there is no guarantee that they will do so.

 

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

 

©2019 BlackRock. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners.

Video 22:54

SIMPLIFYING YIELD & LIQUIDITY CHALLENGES

Examine innovative ways to efficiently add liquidity and seek to enhance yields without disrupting asset allocations or risk profiles.

DANIELA QUINTANILLA: I'm Daniela Quintanilla from the iShares Insurance team. Thanks for joining us today. We’ll be talking about how investors deploy ETFs as building blocks for asset allocation and to capture yield opportunities. Insurance companies increased ETF holdings by almost 20% from 2019 to 2020 and traded $63 billion throughout last year, marking a 10% increase in trading volumes.


Today, I'm joined by Dec Mullarkey from Sun Life and John Reilly from Sompo International, as well as Andrew Masalin, who many of you may recognize from our iShares Portfolio Consulting team. Thanks for the time and welcome.


Let's start with a macro perspective as we head into the final quarter of 2021. Dec, I’ll start with you. How are you positioning portfolios given today’s market environment? Low yields, historically tight credit spreads, and high equity valuations continue to mark the investment landscape. What, if anything, are you doing or planning to do heading into yearend?


DEC MULLARKEY: Great question, Daniela, and it’s aptly put that things are very, very tight. I mean risk premiums are tight for a reason. We’ve got record profits, we've got a very, the benign outlook on credit. But what we’re doing, and we have done for decades I guess is really in these environments really focus on risk management, because the margin for safety is pretty thin. And when you look back at or something I think everybody should be doing is really looking at their asset allocation and making sure that makes sense. I mean over the years we’ve very, very actively revisited our asset allocation and that has led us to add a broader range of assets resulting in greater allocation to privates and private debt, which we have in-house teams to do and alternatives and those have continued to be a great source of additional alpha above and beyond what’s happening in the public portfolio.


Now, the one thing I will stress though is there’s also opportunity within public portfolios and it all comes down to the details, like managing, looking at every name in your portfolio and looking at the broad themes that are actually playing out. And in a tight environment like we’re in, one of the things that is happening certainly within credit is you’re seeing migration. You’re seeing upgrades and you also have a pipeline of fallen angels. And you also have, you know, maybe a pretty active or will have an active M&A cycle. And you need to really pay attention and score all your assets against those themes and then try to tilt and position to either be defensive or take advantage of those.


So, those are some of the things we’re doing. It comes down to at this stage paying a lot of attention to the details and really managing your risk.


DANIELA QUINTANILLA: John, same question for you. How are you positioning the portfolio from a P&C company perspective?


JOHN REILLY: Yeah. I’ll talk about it from kind of the broad asset classes that we look at. So, within core fixed income, we are underweight relative to our strategic benchmark. So, obviously, Dec mentioned kind of the, you know, some of the market dynamics, particularly the low yield environment creates a number of issues within core fixed income. It is more and more difficult to generate any meaningful carry. We think the negative real rates will create a headwind for keeping pace with inflation and ultimately dilute the value of our fixed income portfolio on a inflation adjusted basis. And lastly, you know, with those low rates we anticipate less diversification or less resiliency within our fixed income. You know, we’re assuming that rates, we will have a floor of zero and not go negative.


Within core fixed income, we are overweight high quality short duration securitized product. We do like that as a way to, a substitute for government securities so we can continue with a high credit quality but generate an additional spread. We are slightly tilting toward private securities as a substitute for corporate investment grade credit. We like that from a similar quality perspective, but with an additional spread. And then, from a duration perspective, we are slightly underweight and positioned for a modest curve sneak – steepener.


On the high yield front, we are overweight relative to our strategic benchmark. We do think kind of the continued liquidity in the system, healthy cash balance, balance sheets, and longer tenure maturities will keep default rates lower than historical averages for the foreseeable future. Within high yield, we are tilted toward floating rate product, particularly bank loans as opposed to corporate high yield, similar to Dec. One of our favorite asset classes within high yield is private credit. We do like the, again, the floating rate component with better underwriting and the stronger covenants and additional illiquid spread on top. And then lastly, we are constructive on mezz CLOs and CMBS on an opportunistic basis.


On the equity front, at least in the near-term, we are neutral. We are worried about current valuation levels. But certainly, when you look at equity relative to core fixed income, we do like the opportunity set for equities over the long-term. So certainly we, while we think equity returns will not generate the same returns they have over the last five to seven years, we do think they will outperform core fixed income.


And then lastly, within equities we do favor develop, within developed market equities, excuse me, we do favor European equities, particularly from a valuation perspective and also an income perspective. So, that’s a brief overview of kind of how we’re positioning and directing the portfolio going forward.


DANIELA QUINTANILLA: Thanks, John. Both of you mentioned low yields, which as we know is a persistent challenge for fixed income investors. Would love your views on this. Dec, first to you. How as a life insurer have you addressed that challenge and what role do you see for fixed income ETFs?


DEC MULLARKEY: Yeah. I mean so I mentioned the attention to asset allocation, and I would say that’s something and I think the life industry does a great job of this, at reviewing their allocations on a regular basis. But, we’re pretty manic about that, because I think once you expand the scope of the assets out there and you really start to track the relative value, you then get very comfortable if you see any movement in the market, actually, you know, that you can con-, confidently jump in there and take a position, because regardless of the trend in the market or any cycle you’re in, you’ll always see dis-, disruptions, mini-volatility panics.


And this is where there’s a real role for ETFs, because as a tool they’re very efficient. They get you quickly the, whether it’s the market beta, factor exposure that you need. So, I, I’ve always recommended them as a tool to move quickly in a market and then you let your team add alpha through, you know, more patient selection, which can be funded from the ETF.


The one other area that I really stress that I think ETFs are very effective in is this, again, in this low yielding environment is really, really manage your excess cash balances in terms of trying to stay fully invested. But one thing I think the industry, the ETF industry has done is developed a lot of solutions for really low duration product, you know, a lot of – you find duration under one year where you've got, you know, very, very diversified packages of assets where you can pick up addition – a little yield above and beyond what you’d earn in cash. And normally, life teams are very, very adept at going out, you know, on the long end of the curve and picking up spread there. It almost would be suboptimal for them to focus on that part of the curve and that’s where I guess ETFs really have an advantage on those type of cash solutions.


So, I do think from a dynamic asset allocation standpoint that ETFs are a great starting point to quickly get exposure. And we saw that through COVID. And markets can move very, very quickly and the price discovery, the actual transparency in ETFs really helps to get the beta exposure and then you can focus on having your team add alpha beyond that. So, I think there’s a role. I continue to think there’s a role in any environment for that type of strategy.


DANIELA QUINTANILLA: John, same question for you. Would love to know how you might see ETFs as a tool in the toolkit across asset classes and across the credit curve.


JOHN REILLY: Yeah. So, we really use ETFs for two primary functions. One is kind of a liquidity sleeve or a cash buffer. So, if we know we have corporate needs that are going to be a draw on cash, as a way to generate some additional yield we will invest in some of those shorter duration spread ETF products. It’s far less disruptive to our actively managed portfolio and allows us to earn a higher yield than sitting in cash.


The other is really from a tactical asset allocation decision. So, we use ETFs to get exposure to high yield, to equities in a quick and efficient manner. There’s really two other ways that we’ve talked about using and the first one we have begun to implement is we have given our managers the ability to use ETFs in times of market stress. So, where the price is trading at a meaningful discount to NAV, they can go in and buy those at attractive levels and generate kind of that reversion back to NAV. And then, as that price differential, that spread differential, you know, goes away, they can redeploy that money in, into active strategies.


And the last thing that we are looking at is really using some ETFs, lending ETFs when those ETFs are hard to borrow. So, in the past we have seen kind of a meaningful special lending rate for the high yield ETF and looking at a way, at ways to lend that to generate an additional 50 to 100 basis points of yield on top of that. So, those are really kind of the four major ways that we’re using kind of ETFs in the portfolio.


DANIELA QUINTANILLA: Andrew, what have you seen across the industry with respect to the yield challenge? How have insurers adopted fixed income ETFs as a solution and why?


ANDREW MASALIN: Well, you’ve heard Dec and John already. Insurers have been using fixed income ETFs to address the book yield runoff challenge really in three ways and they’ve referenced two of them.


The first is by using short duration ETFs to eke out incremental yield over cash holdings. Cash allocations have increased during the past three years across all insurer types in spite of the incredibly low yield environment. One of the reasons insurers point to for the buildup in cash is their allocations to privates, which have also increased in each of the last three years. We know that private credit managers have been challenged to put cash to work, and as a result, clients have been looking for cash sweep funds to – looking past their cash sweep funds to earn incrementally more yield, even if it’s just 10 or even 20 basis points. The result has been an 80% increase in insurance assets held in short duration ETFs.


The second way we see insurers using ETFs to deal with the yield challenges they face is through the adoption of ETF liquidity sleeves. As a reminder, an ETF liquidity sleeve is a portfolio constructed of the most liquid fixed income ETFs that is designed to match the specific duration and credit quality of individual insurance portfolios. Insurers use ETF liquidity sleeves as a liquid representation of their broader portfolios and we’ve seen insurers hold liquidity sleeves of anywhere from 1 to 2% of their portfolio as a mechanism to maintain exposure to the higher yielding assets and then use it as a release valve when and if they need to raise cash in the portfolio. This allows them to avoid relatively higher transaction costs from selling cash bonds.


The third way we see ETFs being used to address this low yield environment that we find ourselves in is as a tactical tool to shift their asset allocations. More recently, we've seen investors rotate relatively more of their portfolios toward corporate bonds in order to boost yields. More than 75% of the flows into fixed income ETFs last year actually went into corporate bond ETFs. This is because of the low yield environment that we continue to find ourselves in. And, actually, I'd expect this trend to continue into the coming year.


DANIELA QUINTANILLA: Thanks, Andrew. Turning back to public equity, John, you mentioned a little bit how you use ETFs tactically and how public equities is part of that use case for you. Can you talk a little bit about the role of public equity in the Sompo portfolio and how that might be changing or how you may be making those adjustments or actually building that portfolio, whether through single stocks, ETFs, or other investment vehicles?


JOHN REILLY: Our equity exposure is really our primary exposure to economic growth. So that’s really the mechanism that we want to drive kind of growth and book value from an investment perspective. We use ETFs to get our core beta equity exposure. So, we view US equity as one of the broadest, deepest, most well-researched markets in the world. But it’s also one of the most efficient. So, we do like a large core allocation of passive exposure through ETFs. And then, we create kind of tactical exposures, illiquid hedge fund exposure as kind of a satellite around that core exposure.


Pertaining to ETFs we, not only do we get kind of beta exposure to equities, we do use them kind of tactically to generate either bets that we want to make in – depending on segments of what we see going on in the market. A particular example is when we thought the mega caps were running a little too much, we toggled from a market weighted E-, ETF to an equally weighted ETF. We also use ETFs to target specific sector exposures, things like, you know, a specific bet within cloud computing or a exposure to healthcare. We’ll either use that as a tactical bet or as a placeholder as we’re looking at active managers.


And then, from an income perspective, obviously with rates as low as they are, the dividend yield is in many cases higher than the market yield that we’re earning in fixed income. So, from a income perspective, we also benefit from that higher dividend yield. And this is case in point or most apparent in Europe. So, we do like a small allocation to equities, both from a growth perspective in Europe, but certainly as an additional yield perspective. So, those are really kind of how we, we’re thinking about kind of our equity allocation and how we’re using ETFs within that allocation.


DANIELA QUINTANILLA: Andrew, we’ve worked together on portfolio construction with clients looking to optimize their public equity allocations by reducing costs and being more precise with their exposures. What are your views on the role of public equity in the portfolio and how is your team applying the same lens towards the integration of sustainability into portfolios?


ANDREW MASALIN: Yeah. Great question. I mean, you know, as you know, public equity represents a pretty small component of most insurers’ portfolios. On the P&C side, that’s where we see the primary allocations to equities. I'd say we see two trends.


The first is more and more insurers continue to pile into low-cost core index equity. As you know, insurers historically have tended to favor higher income buy and hold kind of strategies and the average P&C portfolio, for instance, has a 32% higher dividend yield than the S&P 500 . As a result of that, we’ve seen higher sector and security concentrations, which was – have sort of resulted in lagging performance oftentimes. And in those cases where managers may have out-, outperformed, we see that’s really largely attributable to the value factor. So, that’s one trend.


I'd say the second trend that we see commonly across fixed in-, or excuse me, across public equity portfolios is more international. Some amount of home country bias makes some sense. But most equity investments of insurers are 90% focused on US and just given the increase in valuations across US equities, I think it’s probably time to see them rotate into international. You heard Dec and John speaking to this, and my view is that’ll continue.


In terms of ESG, we saw a pretty remarkable year in 2020. The assets invested in ESG oriented ETFs tripled on insurance balance sheets. While levels are pretty small still, only about 1% of total ETF assets, the trend’s accelerated this year. So, there’s plenty of interest. In terms of the role, I mainly encounter ESG ETF allocations within equities where the data are more prevalent, and the decision-making process is a bit easier as a result. In addition, we’ve seen most insurance companies focusing on climate risk in terms of ESG where the linkages to business risk are the most obvious. So, that leaves some gaps. And I'd say this is where most insurance companies have struggled. They’ve struggled with integrated E-, ESG with the rest of the portfolio.


This is an area of focus for BlackRock and on my team, for example, we’ve been running the Insurance Portfolio Construction Review for the past four years, which is there to help. The IPCR is a customized portfolio analysis designed to provide actionable portfolio construction ideas using index tools. Our IPCR is fully integrated with ESG to give a complete view of ESG metrics across equity and fixed income portfolios. This allows me to provide a sense of some of the tradeoffs using more traditional versus ESG oriented investments together, which is really how insurance portfolios are constructed to begin with.


Insurers have made pretty good strides in integrating ESG into portfolios, but still have a lot of ways to go. And, of course, my team is here to help.


DANIELA QUINTANILLA: Dec, Sun Life has made some recent commitments around investing $20 billion in five years across the GA, the general account, and third-party investments. Can you talk a little bit about why sustainability is important to you as an insurance company and what role you might see for ETFs to hit those targets?


DEC MULLARKEY: Certainly, Daniela. Yes. And you’re right. You’re certainly right on the numbers. I mean we’ve been a long-term investor in areas like renewable energy and certainly in our real estate properties our managers have scored very high on their ESG, and we have about $60 billion under management on – in that front.


Sustainability comes from the top at Sun. I mean it’s been, you know, comes down from the board, our CEO. It’s kind of reflected in a lot of what we do. I mean our, one of our tag lines is, you know, finance, you know, for our clients’ financial stability and a healthy life.


So, where we are going with ESG is we’ve made a serious commitment internally that, you know, we have our own proprietary scoring system and we’re going through that process of ranking every asset on the – that basis and moving towards that. And we will certainly execute that, you know, the traditional way we execute any, you know, using instruments we traditionally use, which would be cash, derivatives, funds, ETFs. So, there is, there’s certainly a role there as we go forward to incorporating that.


I mean one of the things that when any client, our client or associate, you know, asks me about, you know, how do they get a handle on ESG, the one thing I point them to is, well, pick one of your favorite asset classes and look at the ETFs that are being offered in that. Usually, you will find obviously the traditional index and then you’ll find one that’s ESG. Adopt it and do a comparison. The E-, the, every, all the information that’s available on ETFs and certainly iShares platform in particular are very, very transparent. So, there’s a lot of information in there and we pay a lot of attention to that as well and to see how institutions like yourself are scoring this, how you’re thinking about it, and how you construct those.


So, we’re learning a lot from each other, and we’ll continue. But, yes, it’s a serious commitment and, you know, we want to be part of, you know, delivering that, you know, clean, inclusive, sustainable future and this is just the first leg of it.


DANIELA QUINTANILLA: Thanks, Dec. I think that’s all we have time for today. Thank you to our panelists for their insights. If you’d like a member of our team to reach out, we’d love to help.

Video 1:35

During the extreme market volatility of 2020, fixed income ETFs passed their greatest test yet.

 

Investors use bond ETFs in their portfolio to diversify away from equities, to preserve capital, and to generate income.

 

Investors turn to ETFs in times of uncertainty because ETFs provide an extra layer of liquidity relative to the underlying bond market; that means that they trade on exchange and when the exchange is open, fixed income ETFs are trading. In some cases, tens of thousands of times in a day, relative to the underlying bond market where bonds may not trade at all or trade maybe 30-40 times in a day.

 

There are four main reasons why fixed income ETFs are growing so rapidly. First: the use of fixed income ETFs in portfolio construction. Second: the rapid adoption from institutions globally. Third: the modernization of the bond markets and ETFs driving this modernization. And fourth: constant innovation.

 

The bottom line is investors turn to fixed income ETFs during this most recent market turmoil and fixed income ETFs were easy access vehicles to the fixed income markets in a very efficient way.

Video 1:24

REPORT AT A GLANCE

Global Head of ETFs and Index Investments Salim Ramji shares four key investing trends he's seen over the past 2 years and how iShares is prepared to support the next generation of investors.

Salim Ramji:

I just wanted to take a moment to thank our 120M clients all around the world, including welcoming our 50M new clients who have entrusted iShares ETFs and index capabilities to invest your money. We strive to be champions of investor progress – of your progress. And that’s not just a slogan, it’s something we really take to heart. We see it as our mission to make investing more convenient for millions and millions of people. We want to make investing more affordable for everybody. We want to make investing more sustainable for the long term, and we want to provide you with the broadest possible choice of how you can invest your money.

 

What I am especially excited about this past year is the 40 million people who’ve opened up investment accounts, often for the first time. That’s more than has opened up investment accounts in the past decade. My hope is that over time this newest generation of investors will also be iShares investors – and my commitment is that we will champion your progress just as we have for millions of investors all around the world.