Washington: BlackRock, the world's largest money manager, is seeking regulatory clearance for its iShares exchange-traded funds (ETFs) to follow proprietary indexes rather than those developed by third parties such as Standard & Poor's.
The application, filed by iShares on Friday with the US Securities and Exchange Commission, would allow future and existing funds to use in-house indexes the firm will create.
IShares, a San Francisco-based subsidiary of BlackRock, ranks as the biggest provider of index-based ETFs with some $649 billion (Dh2.3 trillion) in assets under management in more than 460 funds.
The ETF industry is becoming increasingly crowded, prompting managers to cut fees in order to attract and retain assets, according to Mark Luschini, chief investment strategist for Philadelphia-based Janney Montgomery Scott.
Offering funds based on proprietary indexes would help New York's BlackRock set itself apart from rivals and burnish the company's brand name, said George Simon, a securities attorney at Foley & Lardner in Chicago who specialises in ETFs.
"The game here in the ETF world is to find exclusive licences that you can offer that other people can't," Simon said yesterday in a telephone interview, adding that he had no specific knowledge on the iShares application. "What better way to do that than offer your own, assuming they have some intrinsic value."
Christine Hudacko, a spokeswoman for iShares, declined to comment.
ETFs, typically designed to mimic indexes, hold baskets of securities while trading throughout the day like stocks. All of the iShares index funds currently track benchmarks provided by firms such as S&P, a unit of McGraw-Hill, and MSCI, both of which are located in New York. BlackRock, which acquired IShares through its $15.2 billion purchase of Barclays Global Investors in 2009, must pay licensing fees in order for the funds to use the outside indexes.
The SPDR S&P 500 ETF Trust, managed by Boston-based State Street, pays Standard & Poor's a licensing fee of .03 per cent, or about three basis points, of assets, plus an annual fee of $600,000, according to the fund's most recent prospectus.
That equalled $21.9 million for the year ended September 30, 2010, or 28 per cent of the fund's $79.2 million in annual operating expenses, including its management fee, the document shows. BlackRock, which manages $3.7 trillion in assets, doesn't break out licensing fees for outside indexes in its filings.
Affiliate permission
IShares' SEC application requests permission to set up funds that use indexes "created, compiled, sponsored and/or maintained" by affiliates. Existing funds would also be able to change their "respective investment objective" from seeking to track an outside index to seeking to track a BlackRock index "if deemed appropriate" by the funds' advisers, according to the application.
The SEC has limited the ability of ETFs to rely on in-house indexes out of concern that benchmarks run by affiliates might be prone to manipulation, said Kathleen Moriarty, a securities attorney at Katten Muchin Rosenman in New York who specialises in ETFs.