On 25 March, the New York Fed announced BlackRock had been selected to execute the US central bank’s bond purchases for its ‘unlimited’ quantitative easing programme brought in to support the slowing economy amid the coronavirus turmoil.
So far, the Fed has invested around $1.3bn in ETFs, according to data from ETFGI, 48% of which are in BlackRock products, 35% with Vanguard and 15% with State Street Global Advisors while VanEck and DWS complete the list.
While there are only a certain number of fixed income ETFs that can be selected due to the Fed’s requirements, BlackRock has certainly seen some unintended benefits since the appointment.
Last month, the flagship $49.7bn iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) saw $4.3bn inflows as traders looked to front-run the Fed’s purchases while similar Vanguard and SSGA ETFs saw combined inflows of under $50m.
But does appointment, as the headline on a Bloomberg article put it, make BlackRock ‘the fourth branch of government’? MJ Lytle, CEO Tabula Investment Management, said such hyperbole should be cast aside. For him, the move on the part of the Fed to hire BlackRock is all about execution.
The Fed’s specifications were that a special purpose vehicle (SPV) should be set up with $75bn of cash levered up to 10:1 to purchase $750bn of corporate debt assets.
“The purchase and management of the individual securities and ETFs in the SPV is a massive task,” Lytle continued. “It requires a large execution desk and robust technology.
“The company that takes on a project of this scale has to have significant resources available that can be repurposed instantaneously. This narrows the universe of contenders to a handful of trillion-dollar asset managers.”
In effect, the Fed was picking from a short list of one. “Any business that won this mandate was going to come under scrutiny but the Fed does not have any other options than to turn to a large, commercial asset manager to execute their plan,” Lytle stressed.
However, this does not hide from the fact BlackRock is purchasing BlackRock ETFs and the Fed did not hold a competitive tender for the mandate. As part of efforts to calm conflict of interest fears, the asset manager is waiving any fees on ETFs it receives from purchases on behalf of the Fed.
Irene Bauer, CIO at Twenty20 Investments, said the question comes down to whether there will be strict Chinese walls between the part of the BlackRock business that will be advising the Fed and the credit fund managers, both active and passive, and whether the Fed and the US Securities and Exchange Commission (SEC) will have the systems in place to make sure these are adhered to.
“[BlackRock chairman and CEO] Larry Fink understandably has assured everyone that those Chinese Walls are in place and are robust,” she added.
Lytle, meanwhile, argued that while BlackRock may be in a privileged position with the Fed, this is nothing new for a company of its size. “Executing the mandate for the Fed emphasises the importance of maintaining Chinese walls, but this is not a new challenge,” he said.
“BlackRock’s Aladdin platform supports more than $18trn of assets across 210 institutional clients. The information in those assets and flows dwarfs the Fed’s $750bn investment.”
Wider concerns centre of potential market distortions. BlackRock itself made no further comment than what was said when the news broke while rival Vanguard said it supported the Fed's move into the corporate bond market and believes these actions will help to improve liquidity.
Moreover, a Vanguard spokesperson said the boost given to ETFs as a product by their inclusion in the programme was a big plus and acted as “recognition that ETFs as a vehicle can help stabilize the markets, by providing access to the broad corporate bond markets at scale, in an efficient and cost effective manner”.
The spokesperson added: “Recent market volatility has been the strongest test case for ETFs for years, and they have passed the test. Furthermore, it shows that the Fed will utilise all tools at its disposal to improve market stability and access. This is reassuring for investors.”
As for the criticism that BlackRock will inevitably end up buying its own funds, Peter Sleep, senior investment manager at 7IM, said that the critics are barking up the wrong tree.
“It is not just buying its own ETFs, Blackrock is buying other ETFs using criteria it has agreed with and has been approved by the NY Fed.”
Lytle added that in executing both the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF), where BlackRock will be deciding which ETF to buy and it will be choosing the ETF based on the key elements of benchmark, tracking difference, pricing relative to NAV and liquidity.
“Whether the fund is run by BlackRock or another asset manager is unlikely to be relevant,” he said.
Indeed, he highlighted that since BlackRock has pledged to return the fees generated from purchasing its own funds, it is in fact a worse position than SSGA, Vanguard or any other rivals.
“If the SMCCF buys a State Street ETF then State Street will earn fees on the assets whereas BlackRock would have to return them,” Lytle continued. “Buying a BlackRock ETF will actually damage BlackRock’s profitability statistics as it will increase their AUM but they will have to return the fees so their profit as a percentage of AUM will fall.”
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