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BlackRock Joins the Mutual Fund-to-ETF Conversion Trend

Mutual funds seem to have taken the backseat as exchange traded funds (ETFs) have quickly gathered assets and became the go-to choice for investors big and small. And it looks like there is another major blow to mutual funds, with BlackRock agreeing to follow some of its rivals in converting a mutual fund into an active ETF.

Mutual fund-to-ETF conversions have quickly become the norm with several issuers making the swap. Given that BlackRock is already a leader in ETFs with its iShares brand and massive stable of mutual funds, its first-ever conversion could make it one of the de facto leaders in the active ETF space. With that, rivals may be forced to keep up – or be left in the dust.

Conversions from Mutual Funds to ETFs Grow

There’s no denying that ETFs have quickly become the go-to method for investors big and small to build portfolios and get tactical with their allocations. For traditional asset managers offering mutual funds, this has been a big wake-up call. Outflows from mutual funds continue to grow, with capital appreciation keeping the industry afloat.

To that end, many traditional mutual fund managers have been looking for a way to get into the ETF space. And thanks to SEC rule changes in 2019, the ability to take an old-fashioned mutual fund and turn it into an ETF can now happen.

The trend was kicked off by alternative asset manager Guinness Atkinson. After which, major issuers such as Dimensional Fund Advisors (DFA), J.P. Morgan, Fidelity and Capital Group all converted several large funds into ETFs – some with billions of dollars in assets.

According to Morningstar, over 70 mutual funds have converted to ETFs since 2021, totaling over $100 billion dollars.

BlackRock Enters the Chat

Strangely absent from the mutual fund-to-ETF conversion trend have been the number one and number two ETF issuers: Vanguard and BlackRock … that is, until now.

Vanguard is easy to understand as its patent allows its ETFs to be considered share classes of its existing mutual funds. Moreover, it doesn’t offer too many active funds in the first place, with indexing being its bailiwick.

But BlackRock has finally started to embrace the mutual fund-to-ETF conversion trend.

In a prospectus supplement filed with the SEC, BlackRock revealed that it plans to convert the BlackRock International Dividend Fund and its $700 million in assets into an active ETF by the end of the year. According to the filing, the conversion will offer portfolios “additional trading flexibility, enhanced portfolio holdings transparency, and potential tax efficiency.” 1

The move is significant in many ways. The latest Investment Company Institute’s flow data shows that over $65 billion has exited mutual funds so far in 2024, while ETFs have absorbed more than $250 billion. Last year, more than $656 billion was billed from mutual funds, while ETFs gathered more than $578 billion. Investor preference trends are accelerating. As an asset manager whose portfolio consists of ETFs, is now a requirement.

For BlackRock, the move could strengthen its position as a leader in the world of ETFs – both passive and active. As a whole, BlackRock has roughly $10.5 trillion in assets under management, including a hefty amount of mutual funds. While BlackRock doesn’t break out ETF and mutual fund assets separately in its public reports, the firm does have over $2.6 trillion in these vehicles and over 544 mutual funds counting all share classes.

Among those mutual funds are some heavy hitters. For example, BlackRock’s Strategic Income Opportunities Fund has over $37 billion in assets, while its Equity Dividend Fund has over $19 billion.

Converting these and other funds would instantly make BlackRock one of the largest providers of active ETFs and increase its leadership position in the world of ETFs as a whole. Conversions are what gave DFA and J.P. Morgan the jump they needed to quickly become ETF leaders.

As the world’s largest asset manager, BlackRock has a lot of potential when it comes to such conversions.

Investors Are the Real Winners

With BlackRock entering the conversation about converting its mutual funds to ETFs, the game has significantly changed for investors. As one of the largest asset managers, the firm’s moves carry enormous weight and could adversely affect the prospects of mutual funds.

Third-place ETF issuer State Street recently reported that global investors are allocating to more active ETFs and would be “more apt to purchase a strategy if it was converted from a mutual fund to an ETF.”

There’s a good reason for that: The ETF structure offers a lot of benefits for portfolios. This includes the avoidance of capital gains taxes due to the creation/redemption mechanism and secondary market trading. At the same time, cash drag is eliminated as ETFs can be fully invested. Finally, the costs associated with ETFs are less with lower operating costs, platform listing fees and zero sales loads/12b-1 fees.

With BlackRock acknowledging that investors want ETFs over mutual funds, more conversions of its roster could be at hand. In the end, that is great news for portfolios.

Active BlackRock ETFs

These funds were selected based on BlackRock’s stable of ETFs that feature active management. They are sorted by their YTD total return, which ranges from 1.1% to 14.2%. They have expense ratios between 0.08% to 0.79% and assets under management between $15M to $7.1B. They are currently yielding between 0.4% and 5.5%.

Bottom Line

Conversion of mutual funds to ETFs has been happening at a swift pace, with BlackRock’s latest moves accelerating the trend. As the world’s largest asset manager, BlackRock’s decision carries significant weight and could start a waterfall of conversions from competitors. In the end, investors are likely to benefit from a wider range of investment products that would come with competitive fees.

1 SEC (April 2024). Supplement to Prospectus

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May 17, 2024