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iShares restructuring cross-listed ETFs in Australia

Anshula Venkataraman  |  10 May 2018Text size  Decrease  Increase  |  
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On May 3, 2018, BlackRock announced it proposes to convert 14 of its cross-listed ETFs offered on the Australian Securities Exchange, or ASX, to new Australia-domiciled iShares ETFs in July 2018. Another five products will be shut down. While these changes are subject to investor approval, we think they are likely to go through given the changes should be moderately positive for investors and iShares have consulted with clients before the proposal.

What are the implications?

Fourteen iShares cross-listed ETFs will be converted to Australian-listed products, which will directly invest in their U.S.-listed equivalents. We think this brings several advantages and minimal disadvantages including:

  • Simplified tax regime: A shift to a locally domiciled vehicle reduces U.S. tax complications. For example, cross-listings may entail U.S. estate tax, and require investors to complete W-8BEN forms. As always, investors should seek their own tax advice.
  • Low fees remain: While the new products will be smaller than their U.S. master listings, their fees will remain at their existing low levels.
  • Investment exposure unchanged: There will be no change to the underlying index exposure across products. While it might appear that tracking error has increased, this is likely to be the outcome of using U.S. closing prices for holdings rather than an index tracking issue.
  • No taxable event: BlackRock has received a “draft Class Ruling from the Australian Taxation Office (ATO) on the availability of capital gains tax relief” (Source: ASX). As above, investors should seek their own tax advice.

Morningstar assigns Analyst Ratings to eight of iShares’ cross-listed ETPs, with a total of AUD 7.4 billion under management (as at 31 March 2018):

 

Overall, we think BlackRock’s proposal is a small positive for investors, and we maintain our existing Morningstar Analyst Ratings on all eight funds. There are still details to be ironed out, but iShares already successfully runs similarly structured products in Australia so have the operations and infrastructure already in place, which should assure investors of a smooth transition. We will continue to monitor the situation, though, and if we receive new information, will provide further updates once the changes are confirmed.

At the same time, BlackRock is also closing five U.S.-domiciled iShares ETFs listed on the ASX:

Morningstar currently does not assign any Analyst Ratings to these products. However, IBK was previously rated as Neutral before it was dropped from coverage in 2016 given its lack of diversification, fees, and small asset size.

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Anshula Venkataraman is an Analyst in the manager research team at Morningstar. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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