By Cezary Podkul and Dawn Lim
The Federal Reserve's March commitment to deploy billions of
dollars to prop up the economy was a boon for the company the Fed
hired to help execute its plan: BlackRock Inc., the world's largest
In response to the pandemic-induced market collapse, the Fed
promised to buy corporate bonds and exchange-traded funds that
invest in collections of corporate debt.
The Fed had never bought ETFs or corporate bonds before. The
central bank tapped BlackRock to help advise it and buy the bonds
and funds on its behalf, though the central bank retained ultimate
authority over what to purchase.
The Fed's interventions worked as designed, stoking investor
confidence and restoring market function -- even before the central
bank had bought anything at all. But one side effect was that many
of the funds investors poured into were BlackRock's own, making the
giant firm an even bigger player in the exchange-traded-fund
In the days after the Fed's announcement on March 23, traders
jockeyed to figure out what funds the central bank might buy, and
bought those funds themselves.
BlackRock's share of assets increased in 27 funds Morningstar
Inc. analysts deemed potentially eligible for the Fed program.
BlackRock's share grew from 51% on March 20 to about 56% on July
23, when the Fed last bought ETFs, according to Morningstar.
The funds the Fed ultimately did buy became even more popular
with investors, who put $48 billion into them in the first half of
2020, nearly twice the amount that went in the year before.
BlackRock funds were especially popular: They took in $34 billion,
about 160% more than in the first half of 2019.
"The unprecedented actions taken by the Fed during Covid-19 just
accelerated the trend where the biggest products get bigger," said
Linda Zhang, chief executive of Purview Investments in New
A $7.3 trillion asset manager run by CEO Laurence Fink,
BlackRock was already the largest provider of these kinds of ETFs,
which are commonly used by big institutions to enter and exit
BlackRock President Robert Kapito said that the firm's gains
were neither outsize nor surprising.
He said the firm's most actively traded corporate bond ETFs draw
institutions seeking rapid exposure to markets. This means its
market share expands in periods when investors are more likely to
take risks and contracts when they become more risk averse, he
"The success we've seen in recent years is the result of our
strategic investments into the business over time," he said. "We've
repeatedly gained market share during periods when these investors
increase their risk exposure."
BlackRock's advisory arm aiding the Fed is separate from
BlackRock's asset-management arm, which runs its ETF business.
The firm will receive modest compensation for its role assisting
the Fed -- a roughly $3 million fee for the six months ending Sept.
30, and $750,000 per quarter thereafter, according to BlackRock's
contract with the Fed. BlackRock will also collect fees on the
small corporate bond portfolio it manages for the Fed. BlackRock
isn't charging any fees on ETFs and is rebating fees from its own
iShares ETFs back to the Fed. The central bank limited the amount
of BlackRock ETFs it would buy.
Of the 16 ETFs the Fed ultimately purchased, eight were
BlackRock's iShares funds. BlackRock, Vanguard Group and State
Street Global Advisors made up 99% of the Fed's ETF portfolio,
valued at $8.7 billion as of August. Two remaining funds were
managed by smaller competitors DWS and VanEck.
The thaw in markets meant the Fed only spent about $13 billion
of the up to $750 billion it had designated for corporate-bond and
While BlackRock is set to earn a relative pittance from the Fed,
it made millions in fees from other investors.
"Even if BlackRock waives its fees from the purchases that the
Fed is making, the fact that it is associated with this program
means that other investors are going to rush into BlackRock funds,"
said Bharat Ramamurti, a member of the congressional body
overseeing the Fed's coronavirus stimulus programs, who also worked
for Elizabeth Warren's presidential campaign.
"BlackRock obviously generates fees from those flows. So the net
result is that this is very lucrative for BlackRock," Mr. Ramamurti
BlackRock's popular ETF that trades under the ticker LQD saw
$8.2 billion of inflows in the first seven trading days after the
Fed's March announcement, Morningstar estimates show. The Fed
didn't start buying any funds until May.
BlackRock charges 0.14% in fees for LQD, or $14 for every
Across all categories of iShares bond ETFs, beyond just
corporate bonds, BlackRock's revenue rose 11.5% to $261 million in
the second quarter from the same period last year.
The Santa Monica, Calif., asset manager Angeles Investments
bought about 90,000 shares of LQD in the two days after the Fed's
"It's not that complicated, really. The Fed says, 'We're buying
this.' OK, then, I'm going to buy it too," said Michael Rosen,
chief investment officer of Angeles Investments.
Mr. Rosen said he picked the fund because of its size and
liquidity. His firm had also bought about 45,000 shares of LQD on
Columbia Threadneedle Investments snapped up seven million LQD
shares in March, nearly doubling its position to about 4% of LQD's
shares outstanding, FactSet data show. Wisconsin's state pensions
system bought a million shares. Some actively managed BlackRock
portfolios also increased their exposure to LQD and to several
other bond ETFs managed by the firm, FactSet data show.
State Street published a list of seven potential candidates
across State Street's, Vanguard's and BlackRock's offerings -- and
the guesses were all correct, including BlackRock's LQD.
"If I only had the same luck with picking fantasy baseball
players," said Matthew Bartolini, who heads Americas research at
State Street's ETF division.
Write to Cezary Podkul at firstname.lastname@example.org and Dawn Lim at
(END) Dow Jones Newswires
September 18, 2020 13:46 ET (17:46 GMT)
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