BlackRock adds four ETFs to global sector ESG range

BlackRock has expanded its world sector ESG range with the launch of four ETFs.

The iShares MSCI World Materials Sector ESG UCITS ETF (WMTS), the iShares MSCI World Industrials Sector ESG UCITS ETF (WINS), the iShares World Energy Sector ESG UCITS ETF (WENE) and the iShares MSCI World Communication Services Sector ESG UCITS ETF (WCMS) launched on the Euronext Amsterdam on 11 April.

All four ETFs will track the relevant MSCI ESG Reduced Carbon Select 20/35 Capped sector index and will have total expense ratios (TERs) of 0.25%.

It takes the number of ETFs within in range to seven, after Europe’s largest asset manager switched to ESG indices on three more sector ETFs in February.

The iShares MSCI World Health Care Sector ESG UCITS ETF (WHCS), the iShares World Financial Sector ESG UCITS ETF (WFNS) and the iShares MSCI World Information Technology Sector ESG UCITS ETF (WITS) – with combined assets under management (AUM) of $750m – all saw ESG optimised screens added.

However, two further ETFs which were also earmarked to switch – the iShares MSCI World Consumer Staples Sector UCITS ETF (WCSS) and the iShares MSCI World Consumer Discretionary Sector UCITS ETF (WCDS) – failed to get the required shareholder approval to do so.

Sector ETFs have roared back into favour over the first quarter of 2022 as ETF issuers have cottoned on to investors looking to take a more granular approach in their portfolios.

In February, Invesco slashed the TERs on 18 STOXX Europe 600 sector ETFs from 0.30% to 0.20%.

Sector ETFs in vogue as market dispersions widen

Last year, global flows into sector ETFs were six times higher than a decade earlier, according to data from BlackRock.

Omar Moufti, product strategist for thematic and sector ETFs at BlackRock, said: “Historically on average, the dispersion between the top and bottom sectors is about 30% so if you are able to capture these dynamics, there is a lot of alpha to be generated.”

He added the new launches are intended to allow investors to increase the value tilt in their portfolio while incorporating ESG metrics traditionally found in other segments of the market.

“Investors have been looking to allocate to cyclical or value and if you have implemented ESG, you are typically underweight many of these smaller, more value-oriented sectors. Now investors can build that tactical asset allocation,” Moufti said.

Energy ETFs have been some of the top performing over Q1, while flows into energy products have matched returns, accounting for $880m of the $3.7bn allocated to sector ETFs year to date, according to BlackRock.

However, investors might question how the group has been able to include the sector in its ESG range with some of its top holdings including oil giants such as TotalEnergies (7.3%), BP (4%) and ExxonMobil (4.3%) as well as natural gas company Enbridge (6.5%).

As well as excluding energy companies that are involved in or derive significant revenue from oil sands, or which have high controversies related to the space, the index also has an optimisation element that targets a 20% improvement in ESG score and a 30% reduction in carbon intensity.

“It is in line with our view of financing the transition,” Moufti said. “What energy companies do are essential for how economies function and we are giving added weight to companies that do that in the best way possible, or the most efficient and in the least carbon emitting way possible.”

The entire range will be labelled Article 8 under the Sustainable Finance Disclosure Regulation (SFDR).

Switching to an ESG index on an ETF is seen as a more efficient process, allowing the issuer to forgo transition costs and the extra admin required to build an ETF from scratch.

It is the latest range BlackRock has added ESG metrics to, having already done so in its regional, factor and thematic ranges as investors start to focus on sustainability as a minimum requirement, it said.

Published on April 14, 2022

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