iShares UK Dividend ETF: June 2024 update

• BlackRock has been managing index portfolios since 1971

• This ETF provides diversified exposure to UK companies from the FTSE 350 Index that tend to have a higher yield

• It’s tracked the FTSE UK Dividend+ Index closely since it launched in 2005

How it fits in a portfolio

An ETF is a basket of investments that often includes shares or bonds. They tend to track the performance of an index such as the FTSE UK Dividend+ Index and trade on stock exchanges, like shares. This means their price fluctuates throughout the day.

The iShares UK Dividend ETF offers a low-cost option for tracking the performance of the FTSE UK Dividend+ Index. This index is yield weighted and designed to select and measure the performance of the higher yielding companies within the FTSE 350 Index.

An ETF is one of the simplest ways to invest and can be a low-cost starting point for an investment portfolio aiming to deliver a combination of income and long-term growth. ETFs that focus on UK income paying companies could complement other income funds in a portfolio or could diversify a global portfolio focused on other regions such as the US or Asia.

Manager

Darina Mitchell is the Head of EMEA Factors & Thematics Portfolio Engineering in BlackRock’s ETF and Index Investments Group. She provides oversight for teams based in London who manage factor and thematic iShares equity ETFs.

While Mitchell leads the team, each ETF at BlackRock has a primary and secondary manager, though in practice a broader team helps to manage each ETF. Within the team, portfolio managers rotate their responsibilities, which gives them experience across different regions like the UK, the US and Europe.

Process

This ETF aims to track the performance of the FTSE UK Dividend+ Index, which is made up of 50 UK companies with leading dividend yields. It does this by investing in every company in the index and in the same proportion. This is known as full replication and helps the ETF track the index closely.

The index selects the top 50 high-yielding companies from the FTSE 350 Index, which is the UK’s largest 350 companies. Investment trusts are removed from the index, as are companies that are not forecast to pay a dividend over the next 12 months. The remaining companies are ranked by annual historical dividend yield and annual forecasted dividend yield.

With a focus on high income paying companies, the ETF has a bias towards the financials sector which made up 33.5% of the fund at the end of April 2024. This was followed by consumer staples and utilities at 15.9% and 9.7% respectively.

In any ETF, taxes, dealing commissions and the cost of running the ETF all drag on performance. BlackRock use a system to help them determine the most efficient way to trade. They also cross trade internally across all their index funds and ETFs when there is an index rebalance. This helps to reduce costs.

The ETF can lend some of its investments to others in exchange for a fee in a process known as stock lending. This offsets some of the costs involved with running the ETF. 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.

As this ETF is listed offshore investors are not usually entitled to compensation from the UK Financial Services Compensation Scheme.

Culture

BlackRock is currently the largest asset manager in the world, running around $10.5trn of assets globally as of May 2024. The company was founded by eight partners including current CEO Larry Fink and is known for both active and passive strategies. Employees at BlackRock are encouraged to hold shares in the company 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 ETF 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 ETF effectively.

ESG Integration

BlackRock was an early signatory to the Principles for Responsible Investment (PRI) and has offered Environmental, Social and Governance (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 out 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.

The iShares UK Dividend ETF tracks an index that does not specifically integrate ESG considerations into its process. The ETF can therefore invest in shares issued by companies in any sector.

Cost

The ETF currently has an ongoing annual fund charge of 0.40%. The annual charge to hold ETFs in the HL ISA or SIPP is 0.45% (capped at £45 p.a. in the ISA and £200 in the SIPP). There are no charges from HL to hold ETFs within the HL Fund and Share Account or HL Junior ISA. Ensuring an ETF has a low charge is an important part of tracking the underlying index closely.

As ETFs trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges.

Performance

Over the last 10 years, the ETF has tracked the index well gaining 35.58%* compared to 44.04% for the index. As expected from an ETF, 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 keep performance close to the index.

During the last 12 months, the ETF returned 4.97% versus 5.67% for the FTSE UK Dividend+ Index. This lagged the performance of the broader UK stock market which rose 7.50%. Remember, past performance isn’t a guide to future returns.

Industrials and energy were among the best performing sectors in the UK over the year and the ETF has less invested in these sectors compared to the broader UK market. It has more exposure to sectors that delivered negative returns during this period, which detracted from performance. These were telecommunications, consumer staples, utilities and real estate.

Despite the performance of the ETF lagging the broader UK stock market, the ETF’s yield was 5.45% as of the end of April 2024. In comparison, the yield for the FTSE All-Share Index, which represents 98% of the UK market, was 3.69%. Yields aren’t guaranteed and shouldn’t be considered a reliable indicator of future income.

Higher interest rates have been a tailwind for banks, and they have made a significant contribution to UK dividend growth over the last couple of years. This has largely been driven by HSBC who fully restored its dividends at the end of 2023 for the first time since the Covid pandemic. It has regained its position as the UK’s largest dividend payer - a place it hasn’t held since 2008.

Given BlackRock's size, experience and expertise running ETFs, we expect the ETF to continue to track the index well in future, though there are no guarantees.