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Rachel Aguirre unpacks how active ETFs empower investors

Rachel Aguirre joins Opto Sessions to discuss the reasons behind the rise in popularity of actively managed ETFs, and how they offer greater sophistication to retail investors’ portfolios. She also explains the advantages of four new ETFs launched by BlackRock in recent months.

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Rachel Aguirre is head of US iShares product at BlackRock [BLK], the world’s largest asset manager. iShares, the ETF manager that BlackRock purchased from Barclays [BARC] in 2009, is also the world’s largest ETF issuer.

Aguirre didn’t initially intend to have a career in finance, having studied music at university with a view to becoming a classical pianist. She considers the skills that she learned studying music to be equally applicable to her career as those she learned when studying maths. Foremost among them is “the ability to take something that appears incredibly complex, and turn it into something simple”, she tells Opto Sessions.

Aguirre conceives of her role as one that centres on innovation, and bringing new, useful products to market. As she explains in this episode, that increasingly revolves around offering the kinds of strategies that institutional investors use, such as products that offer downside risk management, to retail investors.

The rise of active ETFs

“Active ETFs are opening up an entirely new avenue of choice for investors,” says Aguirre. “They no longer have to decide between active management and ETFs.” Actively managed ETFs combine the advantages of active-management strategies with those of ETFs, including liquidity, transparency and tax efficiency.

There are, she believes, two fundamental trends currently shaping the ETF industry. The first of these are the types of investment strategies that are being incorporated into “the ETF wrapper”.

“If we go back 20 years when ETFs were first introduced to the market, they tracked well-known market cap-weighted indexes, so they gave exposure to pretty simple markets.” However, new strategies are on the rise, including factor investing and thematic investing.     Factor investing groups companies either by shared exposure to particular macroeconomic factors (such as inflation or credit risk) or by a “style” factor such as discounted valuation or volatility. Thematic investing, meanwhile, targets large, secular business trends, which Aguirre calls “powerful mega-forces of long-term growth”.

The second trend is a change in the types of investors that are using ETFs. Commission-free trading and the growth of digital platforms have, Aguirre says, made investing more accessible and affordable, with ETFs becoming “the vehicle of choice”.

“Active ETFs are opening up an entirely new avenue of choice for investors.”

“It’s the simplicity of these digital platforms and the convenience of ETFs combined that are making [investors] feel empowered,” says Aguirre.

One reason for ETFs’ surging popularity are the favourable tax implications relative to mutual funds. “Over the last 10 years,” says Aguirre, “an average 14% of active ETFs have paid a capital gain in a given year.

“When you compare that to equity mutual funds, that number goes up to 60%. This is going to be an area to watch as the industry keeps growing. We believe that interest among those tax-sensitive investors may continue to grow if we see active ETFs keep capital gain distributions low.”

BINC and BLCV

BlackRock has recently launched two actively managed ETFs.

The BlackRock Flexible Income ETF [BINC] is managed by BlackRock's chief investment officer of global fixed income Rick Rieder, Morningstar’s 2023 Outstanding Portfolio Manager, and launched by BlackRock in May. The fund offers direct access to harder-to-reach fixed-income sectors, such as high-yield, emerging market or securitised assets — parts of the bond market that Aguirre describes as “less liquid and harder for retail investors to source”, and, frequently, more volatile than core bond markets.

BINC is specifically designed, Aguirre says, to sit alongside and complement core bond holdings in a portfolio — a strategy known as ‘barbelling’. Investors can “get exposure using a core bond index ETF for that diversified core holding, then pair that with an alpha-seeking fund like BINC that delivers a unique source of return.”

The BlackRock Large Cap Value ETF [BLCV] was launched alongside BINC in May, and is managed by BlackRock’s global chief investment officer of fundamental equities, Tony DeSpirito.

The BLCV ETF “delivers a value- and income-focused exposure, one that can sit at the core of an investor’s portfolio,” says Aguirre. The fund invests into companies in the Russell 1000 Value Index, but seeks to maximise total return through fundamental research and bottom-up stock selection. It focuses on value stocks with high-quality characteristics such as strong balance sheets and cash flows, and low leverage.

“That combination of value with quality, we believe, is the edge in terms of how we maximise return for this strategy.”

Are buffer ETFs the next big thing?

The value proposition is that these are for investors who are interested in equity growth, but, at the same time, looking for downside protection.

“This is another story of access,” says Aguirre. “Historically, option-based strategies have been difficult for your average investor to gain access to.”

BlackRock has recently launched two funds in the space: the iShares Large Cap Moderate Buffer ETF [IVVM] and the iShares Large Cap Deep Buffer ETF [IVVB]. These funds are designed to protect investors’ portfolios against market downturns using options. IVVM protects investors against a quarterly fall in the S&P 500 of up to 5%. IVVB protects them against a fall of 5-20% in a quarter. Its investors, says Aguirre, “participate in the first 5% drawdown, but then they receive protection against those deeper losses”

This protection comes at the expense of limited upside potential, but, given the current climate, Aguirre believes this is still an attractive proposition for investors.

“Volatility continues to be a top concern for many investors,” she says, “and that’s one of the reasons we’re seeing such a massive amount of cash sitting on the sidelines.”

Both buffered ETFs are designed with long-term holding in mind; options reset quarterly in order to keep the strategies relevant and avoid the need to exit and re-enter positions. While some investors are using them tactically to express a position on market movements, “many more are starting to use these products at the core of a portfolio”.

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Listen to the full interview and explore our past episodes on Opto Sessions. You can also check out all our episodes via our YouTube Channel.

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