BlackRock's $7bn reshuffle an ETFs gamechanger

Summary: The heavyweight is converting 14 US-domiciled, ASX-listed, ETFs into Australian-domiciled funds from July, subject to investor approval. It is also delisting five ASX funds.

Key take-out: For the funds remaining on the ASX, existing investors need take no action. For those being delisted, investors will either need to sell or open a brokerage account able to hold US shares.

Australian investors in US-domiciled shares or funds have long been used to filling out complex W-8BEN forms from the Internal Revenue Service to receive a discounted rate on US withholding tax.

A move just announced by US funds management giant BlackRock related to the bulk of its iShares ETFs product portfolio on the Australian market will soon eliminate that painful tax requirement and simultaneously ease the process for Australian investors and advisers to access its listed funds.

BlackRock has announced that from July, subject to investor approval, it will convert 14 of its cross-listed US iShares ETFs, which collectively hold more than $7 billion in capital, into Australian-domiciled funds. Once converted, the ETFs will be able to offer distribution reinvestment to shareholders.

At the same time, BlackRock is streamlining its US portfolio by delisting five ETFs, which together hold less than $200 million in assets.

Funds to be converted

Source: InvestSMART, Morningstar

Funds to be delisted

Source: InvestSMART, Morningstar

BlackRock's move is logical, and head of the iShares business in Australia, Jon Howie, says it reflects the development of the Australian ETFs sector since iShares launched its first products into the domestic market in 2007 as a way of enabling more investors to access international stocks.

“But what we have realised over the past few years is that the structure of bringing in US funds into Australia has subjected holders of those funds to administration around US tax,” Howie says. “By moving these funds from US-domiciled down to Australian-domiciled, we have completely removed that administrative burden for Aussie investors.

“The possibility that, say, an investor or adviser had forgotten to fill out a form and they therefore didn't receive the benefit of the reduced withholding tax rate, that will be a thing of the past; all investors will receive the lower tax rate because we will handle administration of those forms at the fund level.”

He describes the decision as “a real coming of age” for both the iShares business model and the Australian ETFs industry.

“Up until this point we were really growing, but growing based on borrowing where we could from other parts of the world, to build exposures and help investors build better portfolios.

“What we've now got by doing this is the entire iShares product range will be domiciled in Australia. And it really speaks to the maturity of the Aussie ETFs industry and the fact that given the growth we've seen over the past few years, we've now got a proper business and a proper industry in Australia which is poised to continue to serve investors into the future and to continue to grow very, very strongly.”

In terms of what the BlackRock changes mean for existing iShares investors in the affected funds, here's what you need to know:

Investors in the US-domiciled funds have the option to do nothing. The US ETFs will be converted to Australian ETFs under the same trading code.

For those wishing to exit their positions, once the ETFs have been delisted the securities in the US will be sold and all funds will be returned to Australian investors. BlackRock will meet the costs of brokerage for those sales.

Alternatively, investors wishing to continue to hold the US-domiciled ETF can do so but will need a brokerage account that allows them to hold US securities.

“To some extent across the products that we're closing nationally this opens up room for us to launch new products in the future, so we are definitely considering a number of options in terms of how to deliver more exposure to the market in the future,” Howie says. “But we'll have more to say about that once this project has reached its conclusion.”