Industry Updates

BlackRock shifts six more ETFs to full replication

Three hedged iShares S&P 500 ETFs will make the change

Theo Andrew


BlackRock is fully replicating the underlying index on six more ETFs including three hedged S&P 500 ETFs as it looks to avoid tracking error risk.

In a shareholder notice, BlackRock said the investment strategy of three S&P 500 hedged ETFs, a US quality ETF, an Asia ex-Japan ETF and a North America ETF would all switch from non-replicating to replicating on 18 September.

A non-replicating strategy – also known as an ‘optimised approach’ – can choose whether to hold every stock in the underlying index and the weighting of each. This allows them to mirror the index as closely as possible without fully replicating the underlying benchmark.

The impacted ETFs are:

  • iShares Core S&P 500 UCITS ETF USD (Dist) (IUSA)

  • iShares S&P 500 EUR Hedged UCITS ETF (IUSE)

  • iShares S&P 500 GBP Hedged UCITS ETF (IGUS)

  • iShares Edge MSCI USA Quality Factor UCITS ETF (IUQA)

  • iShares MSCI Pac ex-Japan ESG Enhanced UCITS (PCEL)

  • iShares MSCI North America UCITS ETF (INAA)

In a statement to investors, BlackRock said by following a non-replicating strategy, ETFs could be at risk of being unable to hold the full weighting of the constituents in the underlying index, which would risk increasing the tracking error against the performance of its benchmark.

This is because under an optimised approach ETFs adhere to the 5/10/40 rule for UCITS, which means the maximum weight of a single security can be above 10% only if the top four holdings do not exceed 40%.

When the ETF tracks an index with a single weighting above 10%, they are required to track away from the index to remain UCITS compliant.

Under the full replication, the ETFs will adhere to the 20/35 rule, meaning they can have up to 20% of the fund invested in a single stock.

This limit can then be raised to 35% in a single issuer during exceptional circumstances such as when one issuer exhibits dominance within their respective market.

It comes after the world’s largest asset manager switched three ETFs to fully replicating last month while also making the changes on two more ETFs in March.

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