BlackRock Brings Innovative Active ETF to Australia: Is It Time to Dive into US Shares?

When it comes to active ETFs, Australia has been very slow to adopt much of the offshore innovation. 

Fortunately, we’re about to see how it’s done, with major fund manager BlackRock set to list its first active ETF in Australia.

Interestingly, it will cover the US market rather than the Australian one, which is probably understandable given the much greater size of the US market. 

With a rather complex system and name, the US equities strategy will be known as the iShares US Factor Rotation Active ETF (ASX: IACT) and is expected to list on the ASX in mid-June. 

Given the complexity of the investment process and the added stock turnover, the investment fee of 0.45% seems quite reasonable. 

Outperforming using six factors 

The ETF aims to outperform the broad US equity market based on six factors: value, quality, momentum, size, growth, and minimum volatility and uses a “bottom-up, data driven stock selection approach.” 

You might think that sounds a bit like a mystery black box that does the investing for you and in some ways you would be right, although BlackRock claim their approach should reduce short-term cyclical volatility and deliver outperformance relative to the broader market over time. 

With the US now a major market for many Australian investors, this could be a well-timed entry because it offers a differentiated source of return across market cycles for Australian investors. 

The investment fees are also low enough to make it suitable for a long term strategy and it would seem to be an interesting addition to the plain vanilla S&P 500 ETFs such as BlackRock’s iShares S&P 500 ETF (IVV).

Machine learning has produced good returns 

The local listing is built on its US counterpart DYNF, which has achieved a 10.8% return over the past year and a 19.4% annualised return over the five years to March. 

It has US$17.4 billion in assets under management. 

BlackRock head of investments for enhanced factors, Philip Hodges, said that the new ETF draws on BlackRock’s extensive systematic investment experience, which include a combination of deep research, real-time data, machine learning and BlackRock’s active management expertise.

Mr Hodges is also the portfolio manager of DYNF and said the product was an ideal way of combining some sophisticated investment capabilities using what he called “a convenient, cost-effective ETF wrapper.”  

Very different to a normal index ETF 

Of course, an actively managed ETF is a very different product to a simple index ETF, so investors would need to be sufficiently attracted to the investment methodology before adding it to their portfolio. 

In theory, at least, this ETF should be able to navigate rapidly shifting market conditions, although only time will tell if the extra cost compared to a US index ETF will be justified by a steady rate of outperformance.