Investment-management giant BlackRock (BLK -0.21%) has taken the investing world by storm, ever since its acquisition of the iShares business from Barclays gave it the most powerful exchange-traded fund franchise in the world. But as popular as its ETFs are, BlackRock stock might well be the best way to play the success of the multitrillion-dollar fund manager.
The simple rule for investing in money managers
The beauty of the investment-management business model is that companies like BlackRock can make money regardless of how the market moves. With percentage fees coming based on assets under management, advancing markets definitely play a role in boosting profits. But unlike investors in ETFs, who have to deal with the very real prospect of outright losses, all that happens to BlackRock during tough times is that its revenue drops off. Even during the financial crisis, before BlackRock bought iShares, it was never in any danger of actually posting a net loss.
Moreover, during extremely bullish periods, investors tend to drive up shares of investment management companies. Take a look at how BlackRock stock has performed over the past six months, compared to shares of its two largest ETFs, iShares Core S&P 500 (IVV 0.36%) and iShares MSCI Emerging Markets (EEM 0.97%):
BlackRock Total Return Price data by YCharts.
As you can see, investors in the once-hot emerging market sector have actually lost money recently, while U.S.-centered investors have done much better. But the performance of BlackRock's own shares has crushed both of its biggest ETFs.
What's next for BlackRock?
So far, BlackRock has been able to make a fortune based on its dominance of the index-driven passive ETF market, whereby investors are content to earn returns that come close to matching those of different benchmarks chosen by each fund. By using economies of scale to appeal to institutional investors and by reaching out to retail investors through a lucrative partnership with Fidelity Investments, BlackRock has held onto its leadership position in the industry despite major competition from other providers, most notably Vanguard.
Longer term, though, the big question facing BlackRock is whether traditional mutual-fund providers will enter the ETF space through actively managed ETF offerings. Thus far, active ETFs have largely been limited to the bond-investing arena, as current disclosure rules force active stock-fund managers to give up the proprietary advantages of not having to reveal their holdings as frequently as ETFs would. Some mutual fund companies, however, are looking to the SEC for relief from those requirements, and if successful, the wave of active ETF offerings could pose a major threat to BlackRock's dominance.
The better way to invest
For now, though, BlackRock is poised to keep growing, with expectations for 10% revenue growth both this year and next, and profits rising at an even faster pace. An end to the four-year bull market could put an end to the big run higher for BlackRock stock, but in the absence of a cataclysmic event that would force ETF investors to the sidelines once more, BlackRock appears poised to make good on its profit potential.
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