Fed Hires BlackRock to Help Calm Markets. Its ETF Business Wins Big.

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. (BLK), the world's largest asset manager.

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 (BLK) 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 (BLK) own, making the giant firm an even bigger player in the exchange-traded-fund market.

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 (BLK) share of assets increased in 27 funds Morningstar Inc. analysts deemed potentially eligible for the Fed program. BlackRock's (BLK) 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 (BLK) 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 York.

A $7.3 trillion asset manager run by CEO Laurence Fink, BlackRock (BLK) was already the largest provider of these kinds of ETFs, which are commonly used by big institutions to enter and exit markets cheaply.

BlackRock (BLK) 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 said.

"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 (BLK) advisory arm aiding the Fed is separate from BlackRock's (BLK) 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 (BLK) contract with the Fed. BlackRock (BLK) will also collect fees on the small corporate bond portfolio it manages for the Fed. BlackRock (BLK) 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 (BLK) iShares funds. BlackRock (BLK), 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 ETF buying.

While BlackRock (BLK) is set to earn a relative pittance from the Fed, it made millions in fees from other investors.

"Even if BlackRock (BLK) 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 (BLK) 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 (BLK) obviously generates fees from those flows. So the net result is that this is very lucrative for BlackRock (BLK)," Mr. Ramamurti said.

BlackRock's (BLK) 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 (BLK) charges 0.14% in fees for LQD, or $14 for every $10,000 invested.

Across all categories of iShares bond ETFs, beyond just corporate bonds, BlackRock's (BLK) 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 announcement.

"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 March 16.

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 (BLK) 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 (BLK) offerings -- and the guesses were all correct, including BlackRock's (BLK) 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 cezary.podkul@wsj.com and Dawn Lim at dawn.lim@wsj.com

  (END) Dow Jones Newswires
  09-18-20 1346ET
  Copyright (c) 2020 Dow Jones & Company, Inc.

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