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How Market Volatility Is Affecting Some ETF Issuers

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How Market Volatility Is Affecting Some ETF Issuers
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Few stocks have been immune from the broad market's two-day tumble. Among the punished are companies with direct exposure to the exchange traded funds industry.

This week, shares of BlackRock Inc. (NYSE: BLK), the world's largest assets manager and ETF issuer and WisdomTree Investments, Inc. (NASDAQ: WETF), the only publicly traded pure play ETF sponsor, are among the ETF-related stocks getting drubbed.

What Happened

Shares of BlackRock are lower by 11.91 percent this week. Invesco Ltd. (NYSE: IVZ), the fourth-largest U.S. ETF issuer, has seen its shares tumble 13.57 percent over the same span.

“Increased volatility has led to an increase in U.S.-domiciled ETF outflows at BLK and IVZ, although it appears that WETF has had break-even flows in the U.S. This exhibit excludes non-U.S. Domiciled ETF flows,” said Keefe, Bruyette & Woods analysts Robert Lee and Pell Bermingham in a note out Thursday.

Shares of BlackRock, the owner of the iShares ETF brand, slid 7 percent Wednesday. The KBW analysts offer some insight into the impact of ETF outflows on the stock.

“Simplistically, if we assume the average fee rate on equity ETFs is about 26bp with a 70% incremental margin, then (all else equal) -$100bn of outflows would impact EPS about -$0.85 (our current 2019 EPS forecast is $29.56),” the analysts said. “However, this would also be highly dependent upon the mix. For example, if the outflows were predominately in lower fee core products where average fee rates are below 10bps the impact would be significantly less.”

Why It's Important

For the week ended Oct. 10, five of the 10 worst ETFs in terms of lost assets are iShares funds, more than any other issuer. The iShares Russell 1000 ETF (NYSE: IWB), the iShares iBoxx USD High Yield Corporate Bond ETF (NYSE: HYG) and the iShares Core U.S. Aggregate Bond Fund (NYSE: AGG) are among the offending funds.

To be fair, BlackRock's iShares is the largest ETF issuer in terms of number of funds and three of its funds were also among the top asset gatherers for the week ended Oct. 10.

“In this context, the -7% decline in BLK yesterday to the extent it was exacerbated by concerns over ETF outflows, may be overdone,” said the KBW analysts.

KBW has an Outperform rating on BlackRock and Market Perform ratings on Invesco and WisdomTree.

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