Industry Updates

BlackRock switches tracking methodology on global Islamic ETF

Microsoft was added with a 13% weighting

Jamie Gordon

Islamic crescent on top of mosque

BlackRock’s world Islamic equity ETF has switched from optimised sampling to full replication after the outgoing methodology risked the product incurring tracking error versus its underlying index, ETF Stream can reveal.

Launched in 2007, the $390m iShares MSCI World Islamic UCITS ETF (ISWD) employed an optimised sampling tracking strategy, meaning it does not have to hold all the securities in its benchmark and may allocate no more than 10% of its basket to a single stock.

This became problematic after Microsoft entered the MSCI World Islamic index with a weight of 13% on 1 December 2022, meaning ISWD would not gain proportionate exposure to the company.

Microsoft was previously excluded from the benchmark based on financial ratios screens in the index methodology, BlackRock said in a note.

Following Microsoft’s inclusion, BlackRock changed ISWD to a fully replicating methodology on 11 January. It now holds all the constituents of its parent benchmark, can allocate up to 20% to individual securities and up to 35% during exceptional market conditions.

Prior to the change being implemented, the world’s largest asset manager said: “The current investment strategy of the fund is preventing it to buy the full weight of Microsoft versus the index.

“As a result, the fund’s tracking error has increased versus its underlying benchmark. Therefore, we will be changing the fund’s investment strategy to replicating.”

BlackRock said it expected there to be zero transaction costs associated with the methodology change.

Last March, the firm performed a similar change on its iShares Edge MSCI USA Momentum Factor UCITS ETF (IUMF) and iShares MSCI EM Consumer Growth UCITS ETF (CEMG), changing the tracking methodology from optimised sampling to full replication.

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