BlackRock, king of indexes, snubs passive for bot-built ETFs

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(Bloomberg) -- BlackRock Inc.’s exchange-traded fund business is getting a machine-made makeover.

After building a $1.3 trillion ETF empire on the back of passive funds, the world’s largest asset manager is readying a suite of actively managed equity ETFs designed by...robots. At least seven funds branded ‘‘iShares Evolved’’ will invest in sectors such as innovative health care, media and entertainment, and technology -- slices of the market that have been classified using artificial intelligence, regulatory filings with the U.S. Securities and Exchange Commission show.

The funds mark a departure for BlackRock, which has consistently championed indexed products in its ETF business, particularly in the stock market where all of its existing funds track a benchmark. But, with more than 2,000 funds now competing for assets, scaring up new opportunities is increasingly difficult -- even for a giant like BlackRock.

“One of the areas of white space is active equity ETFs and, because of iShares being part of the BlackRock family, they’ve got the expertise and the resources to try to pull this off,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA Research. “They have increasingly been blurring the lines between the iShares passive business model and the BlackRock active business model.”

A BlackRock spokesman declined to comment beyond the information in the regulatory filings.

While assets in active funds comprise about 1 percent of the $3.3 trillion market, the money manager has already cautiously embraced active management for some bond ETFs, starting eight active funds. It also used its own intellectual property to launch its first self-indexed products in July.

BlackRock will rely on machine learning, natural language processing and algorithms for its new funds. So far, it’s filed for approval to start the seven, according to the SEC’s website. But its analysis breaks down U.S. companies into 12 groups based on information included within their earnings or regulatory filings. Stocks can appear in one bucket, or more than one, depending on the diversity of their businesses.

The 12 sectors are:

  • Consumer Staples (ETF filing)
  • Discretionary Spending (ETF filing)
  • Energy
  • Financials (ETF filing)
  • Healthcare Staples (ETF filing)
  • Industrials
  • Innovative Healthcare (ETF filing)
  • Media and Entertainment (ETF filing)
  • Real Estate
  • Technology (ETF filing)
  • Telecommunications
  • Utilities
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