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In this update, Passive Investment Analyst Alex Watkins shares our analysis on the manager, process, culture, ESG Integration, cost and performance of the iShares Core FTSE 100 Exchange Traded Fund (ETF).
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
An ETF is a basket of investments that often includes shares or bonds. They tend to track the performance of an index such as the FTSE 100 and trade on stock exchanges, like shares. This means their price fluctuates throughout the day.
The iShares Core FTSE 100 ETF invests in the 100 largest companies in the UK. While the FTSE 100 is a UK index, many of the companies also earn money overseas. Investors will therefore be indirectly investing into foreign economies as well as the UK.
A passive fund is one of the simplest ways to invest and can be a low-cost starting point for an investment portfolio aiming to deliver long-term growth.
ETFs that focus on the UK’s largest companies could be used to diversify a long-term global investment portfolio, or one focused on smaller companies or other investments such as bonds.
Dharma Laloobhai is the Head of EMEA ETF Portfolio Engineering in BlackRock’s ETF and Index Investments Group. She provides oversight for teams based in London and Munich who manage developed and emerging market iShares equity ETFs.
While Laloobhai leads the team, each ETF at BlackRock has a primary and secondary manager, though in practice a broader team helps to manage each fund. Within the team, portfolio managers rotate their responsibilities, which gives them experience across different regions like the UK, the US and Europe. This ensures continuity in the way the ETFs are managed, even if there are team changes.
This ETF aims to track the performance of the UK’s largest 100 companies, as measured by the FTSE 100 index. It does this by investing in every company, and in proportion with each company’s index weight. This is known as full replication, which could help the ETF track the index closely.
In any index tracker fund, taxes, dealing commissions and the cost of running the fund all drag on performance. To help keep these costs down, the team aim to make large investments in companies instead of lots of small transactions.
The ETF also has tracking error targets, which measure how closely it's tracking its benchmark. These are monitored by BlackRock on a daily and monthly basis to ensure the fund is closely following the index.
The ETF will lend some of its investments to third parties in exchange for a fee which can help offset some of the fund’s management charges, reducing costs. This is known as securities lending. However, this can also increase risk.
BlackRock provides an indemnity for funds that use securities lending to try to shelter investors. Since the lending program started in 1981, only three borrowers with active loans have been unable to return the securities. In each case, BlackRock was able to repurchase every security with collateral on hand and without any losses to its clients.
BlackRock is currently the largest asset manager in the world. The company was founded by eight partners including current CEO Larry Fink and is known for both active and passive strategies. Employees at BlackRock are encouraged to hold shares in the company so that they are engaged with helping the company perform well and grow. The iShares brand represents BlackRock's family of index tracking and exchange-traded funds.
As the world's largest asset manager, and with lots of resource and knowledge under its belt, BlackRock aims to drive further development in this part of the investment market. Being such a large player in the index tracking arena gives BlackRock unique access to the marketplace, which can help reduce trading costs.
The team running this fund also works closely with various equity and risk departments across the business. We believe this adds good support and challenge on how to run the fund effectively.
BlackRock has offered Environmental, Social and Governance (ESG)-focused funds for several years, including through its iShares range of passive products. However, it only made a company-wide commitment to ESG in January 2020. Following that announcement, the company promised to expand its range of ESG-focused ETFs, screen some thermal coal companies from its actively managed funds and require all fund managers to consider ESG risks.
BlackRock’s Investment Stewardship Team aims to vote at 100% of shareholder meetings where it has the authority to do so, meaning they vote at around 17,000 meetings on 165,000 proposals each year. The Investment Stewardship team engages with companies, in conjunction with fund managers, and the results of proxy votes can be found on the BlackRock website’s ‘proxy voting search’ function.
The firm has courted controversy in recent years for failing to put its significant weight behind shareholder resolutions aimed at tackling climate change. It responded by committing to be more transparent on its voting activity and providing rationales for key votes. The firm also outlines its work on voting and engagement in annual and quarterly Stewardship reports.
As the iShares Core FTSE 100 ETF tracks an index of shares, it does not specifically integrate ESG considerations into its investment process, and the fund therefore has the flexibility to invest in shares issued by companies that are deemed to be ESG sinners, such as tobacco.
The ETF currently has an ongoing annual charge of 0.07%.
There are no charges from HL to hold ETFs within the HL Fund and Share Account. The annual charge to hold ETFs in the HL ISA or SIPP is 0.45% (capped at £45 p.a. in the ISA and £200 in the SIPP). Ensuring an index fund has a low charge is an important part of tracking the underlying index closely.
As ETFs trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges within any Hargreaves Lansdown account.
The iShares Core FTSE 100 ETF has done a good job tracking its benchmark, the FTSE 100 index, over the long term. In the last ten years the ETF has returned 42.57% versus the benchmark’s 44.25%*. As is typical of index tracker funds, it’s fallen behind the benchmark over the long term because of the costs involved. Past performance is not a guide to future returns.
The FTSE 100 index currently has large exposures to sectors such as energy, health care and financial services. Therefore, these sectors could currently have the biggest impact on the market’s performance, though the makeup of any index can change over time.
Over the last year, the FTSE 100 has returned 9.60% to the end of February 2023. UK Oil & gas companies in particular have performed well over the year. This is partly down to the ongoing effects of the Ukraine crisis which has led to a surge in global oil & gas prices and inflation.
Given BlackRock's size, experience and expertise running ETFs, the fund could continue to track the index well in future, though there are no guarantees on how it will perform. A glance at the five-year table below shows that in some years the fund has tracked its benchmark closer than others. Remember, past performance isn’t a guide to future returns.
|Feb 18 – Feb 19||Feb 19 – Feb 20||Feb 20 – Feb 21||Feb 21 – Feb 22||Feb 22 – Feb 23|
|iShares Core FTSE 100 ETF||2.02%||-2.80%||1.27%||19.01%||9.56%|
Past performance is not a guide to the future. Source: *Lipper IM to 28/02/2023.
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Our ETF research is for investors who understand the risks of investing and that investing in ETF's isn't right for everyone. Investors should only invest if the ETF's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of an ETF before they invest, and make sure any new investment forms part of a diversified portfolio.
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