BlackRock ETFs Get Billions Via Trades Hinting at Tax Avoidance

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Five BlackRock Inc. funds just recorded massive inflows that carry all the hallmarks of tax-ducking ETF trades known as heartbeats.

The exchange-traded products collectively lured about $13.5 billion on Wednesday amid the rebalancing of the FTSE Russell indexes, compared with a $37 million inflow for all five funds last week.

Unexpected surges like this can occur for multiple reasons including a large investor shifting funds or adjustments by a major portfolio. But all these BlackRock ETFs have a track record that shows at least one sudden major inflow, followed almost immediately by a corresponding outflow -- the tell-tale signs of a heartbeat trade.

These are perfectly legal transactions designed to defer taxes faced by fund investors and are fairly common within the ETF industry, although the scale of the trades over this short timeframe is somewhat unusual.

A spokesperson for BlackRock didn’t immediately respond to a request for comment.

BlackRock ETFs Get Billions Via Trades Hinting at Tax Avoidance

Known as a heartbeat since the flows resemble the blip of a cardiac monitor, these trades occur when a fund is looking to get rid of stocks that have appreciated in value, without incurring taxes.

“It’s really one of the true beauties of the structure,” said Athanasios Psarofagis, ETF analyst for Bloomberg Intelligence “The ability to do these custom heartbeats ahead of a major index re-balance is a big advantage, whether it’s an annual reconstitution like the Russell 1000 or a higher turnover strategy.”

This naturally takes place in ETFs, because inflows and outflows are made via a market maker who by design swaps assets for shares rather than transacting in cash. With a heartbeat, a friendly bank is pumping extra assets into a given fund so that extra withdrawals can be made -- allowing more equity gains to be washed out.

The trigger for Wednesday’s activity is likely this week’s rebalancing of FTSE Russell indexes, which means funds are looking to get rid of shares that have appreciated significantly. It’s highly likely that other ETFs are affected and similar heartbeat trades are occurring with other issuers.

All five of the BlackRock funds involved follow FTSE Russell gauges. They are:

  • The iShares Russell 1000 Growth ETF (ticker IWF). Saw a record $6.7 billion infusion.
  • The iShares Russell Mid-Cap Growth ETF (IWP). Added $2.3 billion, one of its largest-ever inflows.
  • The iShares Russell 2000 Value ETF (IWN). Added $2.1 billion.
  • The iShares Russell 1000 Value ETF (IWD). Added $1.6 billion.
  • The iShares Russell Mid-Cap ETF (IWR). Added $796 million.

In order to complete the heartbeat, large outflows can be expected in the coming days.

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