MW BlackRock just did its first mutual fund-to-ETF conversion. Here's why.

By Christine Idzelis

'We do expect to convert additional mutual funds into active ETFs,' says BlackRock's Rachel Aguirre

BlackRock has flipped a mutual fund to an exchange-traded fund for the first time, with the giant asset manager's move reflecting investors' increasing appetite for actively managed ETFs.

The firm turned the BlackRock International Dividend Fund into the BlackRock International Dividend Active ETF (BIDD), its first U.S.-listed active ETF seeking to invest in high-quality, dividend-paying stocks across international developed and emerging markets.

The conversion marks "a significant milestone for us," said Rachel Aguirre, head of U.S. iShares product at BlackRock, in a phone interview. "We do expect to convert additional mutual funds into active ETFs" where it makes sense for the strategy and existing shareholders, she said.

Investors have been signaling a preference for ETFs over mutual funds because of their tax efficiency, low cost, daily transparency and the ability to trade them intraday on an exchange, according to Aguirre. To help meet investor demand, conversions to ETFs have picked up over the past few years, while firms have also launched exchange-traded funds with strategies similar to their existing mutual funds.

For example, in the past 12 months BlackRock listed the iShares Total Return Active ETF BRTR, iShares Large Cap Growth Active ETF BGRO, iShares High Yield Active ETF BRHY and iShares Technology Opportunities Active ETF TEK - all of which have strategies similar to those already pursued by the firm's existing mutual funds.

The mutual fund that just converted to the BlackRock International Dividend Active ETF had about $765 million in assets under management as recently as Nov. 14, according to a spokesperson for the firm.

The new ETF will have a net expense ratio of 0.61%. The majority of the existing shareholders of the BlackRock International Dividend Fund will see cost savings from the conversion, as the mutual fund's fees ranged from 0.61% to 1.65%, depending on the share class, said Aguirre.

The converted ETF is actively managed by BlackRock's co-head of its global equity team Olivia Treharne and portfolio manager Molly Greenen. They aim to beat the fund's benchmark, the MSCI ACWI ex US Index, according to BlackRock.

"We expect that the active ETF industry is going to continue to grow," said Aguirre. BlackRock manages $33 billion in assets across more than 40 active ETFs in the U.S.

Morningstar has tallied 34 mutual fund conversions to ETFs last year, up from 20 in 2022, according to Bryan Armour, the firm's director of passive strategies research. The total so far this year is even higher, at 49 as of Nov. 14, although the jump is skewed a bit because it includes 32 from a suite of Stone Ridge funds with various target dates, Armour said.

Last month, the Essential 40 Stock ETF ESN, First Trust WCM Developing World Equity ETF WCME and First Trust WCM International Equity ETF WCMI converted from mutual funds, according to Morningstar data. The PIMCO Mortgage-Backed Securities Active Exchange-Traded Fund PMBS converted from a mutual fund in September, the data show.

"There's been significant growth in the active ETF market," Armour said by phone. "We're seeing much broader adoption there."

-Christine Idzelis

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November 18, 2024 08:01 ET (13:01 GMT)

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