Last Friday (1/22/10), BlackRock (BLK) announced four new international sector product suites and the first five ETFs within those suites. If BlackRock follows through on the complete rollout, each suite will have funds for each of the 10 GICS sectors, or 40 new ETFs in all. International sector ETFs have not been terribly well-accepted by ETF investors, and this launch should help determine the ultimate fate of this currently struggling category.
The four new international sector suites are based on MSCI indexes providing “useful building blocks within a larger MSCI-based international product set”:
- MSCI All Country World Index (ACWI) excluding US Sectors: 10 GICS sectors encompassing the Developed (excluding US) and Emerging Markets (excludes Frontier Markets)
- MSCI Emerging Markets Sectors: 10 GICS sectors based on 22 Emerging Markets
- MSCI Europe Sectors: 10 GICS sectors across the 16 Developed Markets of Europe (excludes Emerging and Frontier Markets)
- MSCI Far East Sectors: 10 GICS sectors across the three Developed Markets of the Far East (Japan, Hong Kong, Singapore)
The BlackRock press release states the funds seek to provide more modularity and focus in expressing regional differences in sector performance. “We are excited to expand our international financial and materials sector fund offerings as it is an underserved segment of the market and one that continues to draw strong investor demand,” said Michael Latham, co-CEO of iShares at BlackRock.
The five new funds include two from the Emerging Markets Sector group and one from each of the others. They were listed on Nasdaq on January 22, 2010 and have expense ratios of 0.72% for the emerging market funds and 0.48% for the other three. The five new funds are:
- iShares MSCI ACWI ex US Financials Sector Index Fund (AXFN) provides exposure to the financial sector of developed and emerging market countries, excluding the United States. AXFN offers the only GICS-based financial sector classification that also includes emerging markets exposure. The top five countries are UK 13%, Australia 10%, Canada 10%, Japan 9%, and Spain 6%. AXFN overview
- iShares MSCI Emerging Markets Financials Sector Index Fund (EMFN) covers the financial sector of emerging market countries, including banks, diversified financials, insurance, and real estate. The top five countries are China 28%, Brazil 14%, South Korea 10%, India 8%, and Taiwan 8%. EMFN overview
- iShares MSCI Europe Financials Sector Index Fund (EUFN) includes the European financial sector. The top five countries are UK 29%, Spain 13%, France 13%, Switzerland 12%, and Germany 10%. EUFN overview
- iShares MSCI Far East Financials Sector Index Fund (FEFN) provides exposure to the financial sector of developed countries in the Far East. The country breakdown of the index is Japan 63%, Hong Kong 26%, and Singapore 12%. FEFN overview
- iShares MSCI Emerging Markets Materials Sector Index Fund (EMMT) gives investors coverage of the materials sector of emerging market countries. The materials sector includes companies involved in chemicals, construction materials, containers & packaging, metals & mining, and paper & forest products. The top five countries are Brazil 30%, South Africa 13%, South Korea 12%, Taiwan 10%, and China 7%. EMMT overview
Success in non-US sector ETFs has proven elusive for all who have tried. There are already five non-US sector suites on the market, and the number expands to nine with these new products from iShares. iShares was the first to move beyond US borders with their S&P “global sector” products in 2001 (some were not available until 2006). WisdomTree’s “international sector” offerings in 2006 were the first to exclude US companies, and the SPDR S&P “international sectors” arrived in 2008. In 2009, we were introduced to Emerging Global Shares “emerging market sector” ETFs and Global X “China sector” ETFs.
The most successful of the existing lineups are the S&P “global sectors” from iShares. Whether that success is the result of the iShares brand or the inclusion of US companies is unclear. What is clear, however, is that an international sector shake-out is about to begin. There is not enough investor interest to support nine different product lines.
With this announcement, BlackRock appears to acknowledge that not all will survive, including some of their new ones. Launching just the financial sector ETFs for three of the four suites seems to be a “throw it against the wall and see what sticks approach.” They appear to have a little extra faith in their new “emerging market” sectors, as they actually launched two of these funds.
My guess is that the new Europe and Far East suites will likely fail. The emerging market sector ETFS have the most potential and could cause problems for Emerging Global Shares. I like the concept behind the ACWI excluding US products. However, I also like the similar concepts behind its two major competitors (WisdomTree International Sectors and SPDR S&P International Sectors), but investor acceptance has been slow.
My ETF Deathwatch already contains a large number of non-US sector ETFs. The significant expansion within the category will not help. I expect several of these nine product lines will eventually have to throw in the towel.
Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.