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Q1 ETF Inflows Dive at BlackRock: Tough Road Ahead?

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Unlike preceding quarters,net asset inflows to BlackRock Inc.’s (BLK - Free Report) ETF business dropped 46% in the first quarter to $34.6 billion from the year-ago quarter. However, despite a decline in inflows, BlackRock’s first-quarter 2018 adjusted earnings came in at $6.70 per share, which breezed past the Zacks Consensus Estimate of $6.42.

Also, the bottom line was 28% higher than the year-ago quarter. Net income (on a GAAP basis) was $2.19 billion, up 27% from the prior-year quarter (read: Solid ETF Asset Inflows Boost BlackRock Earnings).

Revenues (GAAP basis) were $3.58 billion, up 16% year over year. The rise was driven by an increase in all revenue components except investment advisory performance fees, which remained stable. The reported figure came ahead of the Zacks Consensus Estimate of $3.28 billion. Total assets under management increased to $6.3 trillion.

What Caused a Declined in ETF Inflows?

The world's largest asset manager has been making a killing for the last few quarters thanks to lower fees.BlackRock slashed expense fees for some of its iShares ETFs in recent times. It is being said that the company took the step to give tough competition to other low-cost players like Vanguard and Schwab (read: 6 ETF Trends Likely to Take Centre Stage in 2017).

Thanks to investors’ quest for lower fees,ETFs charging 0.2% or less made up about 82% of the industry’s net flows in Q1, up from 77% in the fourth quarter, according to research from Bloomberg Intelligence.

According to the article published on Bloomberg, a correction in the broader market in Q1 thanks to rising rate concerns and increasing inflationary expectations led increased market volatility, which in turn kept investors from further ETF investments. Plus, the tax reform passed in late 2017 led mainly institutional investors to de-risk and re-balance their portfolios, according to BlackRock’s chief executive officer.

iShares Core MSCI EAFE ETF (IEFA - Free Report) tracing Europe, Australia and Far East was the topper with about $14.6 billion inflows, but despite targeting the EAFE market, iShares MSCI EAFE ETF (EFA - Free Report) lost about $6.19 billion in assets.

Emerging market funds like iShares Core MSCI Emerging Markets ETF (IEMG - Free Report) and iShares MSCI Emerging Markets ETF (EEM - Free Report) hauled in about $6.13 and $2.60 billion in assets, respectively, but iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD - Free Report) and iShares Russell 1000 Value ETF (IWD - Free Report) saw respectively $5.75 billion and $3.75 billion of assets fleeing (read: Q1 ETF Asset Report: Developed Markets Win, High-Yield Loses).

Pressure Ahead of BlackRock?

Several analysts are of the view it would be tough for BlackRock ahead to hold up the same success in revenue and profit growth in the coming days. “Sustaining growth at double-digits in terms of asset flows will be really tough to do" for BlackRock, said an analyst at Edward Jones & Co.

Moreover, a set of rules under the Department of Labor’s “fiduciary standard,” which asked advisors to give precedence to their client’s interest over their own, led brokers to dump cash into low cost ETFs. Now, with chances of deregulations in the financial sector doing rounds, such urgencies may not be felt by brokers.

Since BlackRock’s less-expensive ETFs contribute greatly to its business growth, the asset manager could feel the pressure on revenues ahead. In fact, to maintain profitability, BlackRock is also striving to broaden its exposure to higher-fee alternative offerings and focusing on building its technology business.

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