BlackRock is set to start fully replicating the underlying index on two ETFs, its US momentum factor and emerging markets consumer growth sector strategies.
Currently, the iShares Edge MSCI USA Momentum Factor UCITS ETF (IUMF) and iShares MSCI EM Consumer Growth UCITS ETF (CEMG) follow a non-replicating strategy, meaning they can choose whether they hold every security in their underlying benchmark – and the weighting of each.
Often described as an ‘optimised sampling’ approach, ETFs will aim to mirror the index as closely as possible without fully replicating the underlying benchmark.
Under this approach, IUMF and CEMG adhere to the 5/10/40 rule for UCITS which means the maximum weight to a single security can be above 10% only if the top four holdings do not exceed 40%.
A minimum of 12 stocks can then be used to fill up the remaining 60% of the basket at a 5% allocation each.
Under these rules, when an ETF tracks an index with a single weighting above 10%, they are required to track away from the index to remain UCITS compliant.
However, by becoming fully replicating, IUMF and CEMG will be exempt from those limits and move to the 20/35 rule, meaning they can take higher concentrations of up to 20% in a single security.
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.
Both ETFs plan to begin tracking the exact holdings and weightings of their underlying indices on or around 15 March, subject to approval from the Central Bank of Ireland (CBI).