BlackRock CEO Says Industry to Lose Money on Active ETFs

Jul.22.11 | About: BlackRock, Inc. (BLK)

The chief executive of BlackRock (NYSE: BLK), owner of the world’s largest exchange traded fund manager iShares, says the business will have a difficult time turning a profit on actively managed ETFs until they gain more traction.

The category represents a small portion of the industry’s growth “despite all of the noise, despite all of the articles about active ETFs,” BlackRock CEO Larry Fink said during the investment manager’s earnings call this week.

Although he said BlackRock will be building active ETFs, out of the $50 billion in net new business in ETFs as an industry, only $800 million was in active ETFs.

Still, it is early in the game for active ETFs, and many financial advisors wait for a three-year track record. Some actively managed ETFs have had success gathering assets.

“It is going to be very hard to make much money in active ETFs until you start seeing greater growth rates,” Fink said, according to a transcript of the BlackRock conference call. “I do believe the predominance of ETFs will always be in the index space.”

Also, regulators and investors are beginning to differentiate more between ETFs and exchange traded notes, he said. ETNs are debt instruments issued by financial institutions that introduce credit risks not found in ETFs.

In 2009, BlackRock agreed to buy the iShares ETF unit from British bank Barclays, which kept the iPath ETN business.

Fink said the overall ETF business is growing at a faster rate in 2011, while mutual fund inflows are stalling.

“Much of this in my opinion is related to the great global uncertainty. Clients are looking for more liquidity as they tactically allocate. And ETFs are a great vehicle for liquid tactical allocation,” the BlackRock CEO said.