iShares US Equity Index: April 2024 fund update

• BlackRock has been managing index portfolios since 1971

• This fund provides low-cost exposure to the largest companies in the US

• It’s closely tracked the FTSE USA Index since launch

• This fund does not currently feature on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The iShares US Equity Index Fund invests in the US which is home to some of the most established and well-known brands globally such as Microsoft and Apple. This fund mainly invests in large companies and across a range of different sectors.

An index tracker fund is one of the simplest ways to invest and can be a low-cost starting point for a portfolio aiming to deliver long-term growth. This fund could be used to diversify a portfolio investing in other areas such as Europe or Asia or could add US exposure to a portfolio of tracker funds.

Manager

Dharma Laloobhai, Managing Director, is EMEA Head of Core Index Equity Portfolio Management within BlackRock's ETF and Index Investments (EII) Index Equity team. She’s responsible for fund managers based in London and Munich who manage developed and emerging market iShares equity index funds and ETFs.

Every equity index fund at BlackRock has a primary, secondary and tertiary manager, who each have the ability to run the fund, along with the wider team. The wider team is well-resourced and experienced in index investing.

BlackRock’s global approach allows them to work closely with their teams across the world, aiding more efficient management of their funds. We have positive conviction in BlackRock’s ability to provide simple and effective tracking options for investors.

Process

The fund aims to track its benchmark, the FTSE USA Index, by investing in every company in the index and in the same proportion. This is known as full replication and helps the fund closely match the performance of the index.

The fund invests in around 590 companies, mainly in the technology sector which currently accounts for 35% of the fund. The rest is spread across a variety of industries such as consumer discretionary, healthcare, industrials and financials.

Keeping costs low is a key part of the team’s strategy to track the index closely. The portfolio managers communicate with teams in the US to ensure trades are placed at the best price, keeping costs low.

The fund can lend some of its investments to others in exchange for a fee in a process known as stock lending. This also helps to keep costs low. Since BlackRock’s lending program started in 1981, only three borrowers with active loans have defaulted. In each case, BlackRock was able to repurchase every security out on loan with collateral on hand and without any losses to their clients. Even so, stock lending is a higher risk approach.

The fund has tracking error targets, which measure how closely it's tracking its benchmark. These are monitored by BlackRock on a daily and monthly basis to ensure the fund is being run efficiently.

Culture

BlackRock is currently the largest asset manager in the world. The company was founded in 1988 by eight partners including current CEO Larry Fink and is known for both active and passive strategies across the world. Employees at BlackRock are encouraged to hold shares so that they are engaged with helping the company perform well and grow. The iShares brand represents BlackRock's family of index tracking and exchange-traded funds.

As the world's largest asset manager, and with lots of resource and knowledge under its belt, BlackRock benefits from unique access to the marketplace, which can help reduce trading costs. BlackRock is also a pioneer in the passive investment space and has a track record of innovation in this part of the investment market.

The team running this fund also works closely with various equity and risk departments across the business. We believe this adds good support and challenge on how to run the fund effectively.

ESG Integration

BlackRock was an early signatory to the Principles for Responsible Investment (PRI) and has offered ESG-focused funds for several years, including through its iShares range of passive products. However, it only made a company-wide commitment to ESG in January 2020. Following that announcement, the company promised to expand its range of ESG-focused ETFs, screen some thermal coal companies from its actively managed funds and require all fund managers to consider ESG risks.

BlackRock’s Investment Stewardship Team aims to vote at 100% of meetings where it has the authority to do so. The Investment Stewardship team engages with companies, in conjunction with fund managers, and the results of proxy votes can be found on the BlackRock website’s ‘proxy voting search’ function. The firm also outlines its work on voting and engagement in annual and quarterly Stewardship reports.

The firm has courted controversy in recent years for failing to put its significant weight behind shareholder resolutions aimed at tackling climate change. It responded by committing to be more transparent on its voting activity and providing rationales for key votes. In 2024, Blackrock announced that its US arm would step back from the Climate Action 100+ collective engagement initiative, citing legal considerations, although it suggested its international arm would remain a member.

As the iShares US Equity Index Fund isn’t an ESG-specific fund, there are no company exclusions applied like weapons or tobacco, however an ESG version of this fund is available.

Cost

The fund has an ongoing annual fund charge of 0.05%. We believe this is excellent value when compared with other passive funds in this sector. This is also one of the lowest cost funds on the HL platform for passively tracking the US market.

Our platform charge of up to 0.45% per annum also applies, except in the HL Junior ISA, where no platform fee applies.

Performance

Since launch, the iShares US Equity Index fund has done a good job of tracking the FTSE USA Index. As is typical of index funds, it’s fallen behind the benchmark over the long term because of the costs involved. However, the tools used by the managers have helped to try and keep performance as close to the index as possible.

Interest rates and inflation have been a key focus for investors over the past couple of years. The US Federal Reserve (Fed) have kept interest rates steady since it raised rates to a 23 year high in July last year and have indicated that it will start cutting rates at some point in 2024.

One of the triggers to cut rates is when inflation comes down towards the Fed’s 2% target. Inflation in the US has fallen significantly from its peak of 9.1% in June 2022, which was the highest level in over 40 years, but it’s still above target.

Over the last 12 months, the fund has tracked the index tightly and returned 29.08%*. Growth companies, like those in the technology sector, are sensitive to interest rate movements and have therefore performed well with the expectation of rate cuts on the horizon. Technology companies have been the main contributor to the fund’s performance over the year.

The companies known as the ‘Magnificent Seven’ – Google parent Alphabet, Amazon, Apple, Meta (previously Facebook), Microsoft, Nvidia and Tesla – have dominated the market due to the significant developments in Artificial Intelligence (AI). The returns of these giant technology companies have a big impact on the performance of the fund as they make up around 28% of the fund’s assets.

Given BlackRock's size, experience and expertise running index tracker funds, we expect the fund to continue to track the FTSE USA index closely in the future, though there are no guarantees.