BlackRock Makes a Splash with Dual Share Classes

The biggest ETF issuer has something to share.

BlackRock is coming to the table with its first exchange-traded fund share classes. The company, which filed with the Securities and Exchange Commission for them this week, is giving the dual-share-class treatment to actively managed strategies representing $55 billion. The five mutual funds don’t already have iShares counterparts.

“iShares is pretty heavily dominated by passive, index-based strategies,” said Dan Sotiroff, associate director of manager research at Morningstar. “Mutual funds aren’t selling right now. ETFs are where the money is going.”

Easy Wins

Three of the funds getting an ETF share class are muni bond funds, which makes sense, as those are less likely to be used heavily within 401(k)s and be complicated by the dual-share-class treatment, Sotiroff noted. BlackRock’s initial set of products includes its High Yield Portfolio, Strategic Municipal Opportunities Fund, California Municipal Opportunities Fund, New York Municipal Opportunities Fund and Equity Dividend Fund. Current investors in those mutual funds will not have to move their assets, per a company announcement. “The proposed share classes would give investors greater choice in how they access the same established portfolios, combining the flexibility and potential tax and cost efficiencies of an ETF with BlackRock’s investment expertise and long-term track records,” Elise Terry, head of Americas iShares at BlackRock, said in the firm’s announcement. 

The company is one of relatively few that have moved forward with dual share classes, even as 80-plus have received exemptions from the SEC to do so. The slow rollout industrywide is due in part to the operational complexities of offering both vehicles. Some longtime asset managers in the mutual fund space have only recently started offering ETFs, as facilitating the creation and redemption process is a new development for them. It has been more common for firms to add corresponding ETFs for mutual funds or to convert strategies, as Northern Trust is planning to do with six mutual funds representing about $33 billion.

Some of those that have either launched or have filed for dual share classes:

• Dimensional Fund Advisors, which has launched and merged ETFs as a share class.
• F/m Investments, which brought the first mutual fund share class to an ETF, and is being acquired by T. Rowe Price.
• Fidelity, which added its first ETF share classes of several funds in June.

Open the Floodgates … Ever So Slightly: It’s likely that more asset managers will add dual share classes as the structure becomes more common and operation becomes second nature. “It’s not a tidal wave,” Sotiroff said. Dual share classes, like fund conversions, are “both tricky to do. You don’t just flip a switch.”