Industry Updates

UCITS rule leads BlackRock to change benchmark on two ETFs

Tom Eckett

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BlackRock is set to change the benchmarks on two emerging market ETFs that offer single country exposure to Korea and Taiwan in order to meet UCITS regulation more practically, ETF Stream can reveal.

Effective 11 February, the iShares MSCI Korea UCITS ETF and the iShares MSCI Taiwan UCITS ETF will track the respective MSCI Korea and Taiwan 20/35 indices in order to meet 20/35 UCITS rules.

The move follows a shareholder vote in favour of updating the benchmarks.

UCITS rules state a fund’s top holding must remain below 35% of the portfolio while no other security can exceed 20%.

The two ETFs previously tracked indices that held single securities with a weighting greater than 35% meaning BlackRock was manually required to ensure the ETFs did not exceed this limit.

As a result, the firm said the two ETFs saw their tracking error increase when it was forced to reduce its weightings in order to avoid a breach in the rules.

The new indices will enable BlackRock to remain within the UCITS rules while reducing the tracking error of the ETFs.

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In a note seen by ETF Stream, BlackRock said: “Given each index holds a single security over 35% we are manually required to ensure the funds exposure does not exceed this threshold.

“Consequently, this increases the funds tracking error when it is forced to reduce its holdings to avoid a breach.

“The new benchmark introduces caps on single security holdings with the aim of enabling compliance with the 20/35 UCITS rule and reducing tracking error.”

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