BlackRock and Amundi zero in on concentrated ‘mega-cap’ ETFs

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BlackRock and Amundi are lining up heavily concentrated US “mega-cap” exchange traded funds in Europe, going against the flow of money into strategies intended to protect investors from overconcentration.

The Central Bank of Ireland recently granted approval for the Amundi MSCI USA Mega Cap Ucits ETF and iShares S&P 500 Top 20 Ucits ETF, which are both designed to track the largest companies responsible for most of the returns of the country’s flagship stock index year to date.

The BlackRock ETF launched earlier this month, while the Amundi strategy will list at the beginning of December.

But the timing of their launches has been questioned by investors.

European equal weight funds gathered record net flows in September, totalling €2.9bn, taking inflows for the quarter to €3.9bn, according to Morningstar data.

One wealth management executive, speaking on condition of anonymity, said the ETFs would launch at an “inopportune time” but would have been “in the making for months” by the two asset managers.

“[The launches] do go against the current wisdom, especially after Trump’s election win,” the person said.

“A few of our portfolio managers have asked me about opportunities in US small caps or equal weight strategies [following the election].”

Brett Pybus, head of iShares product strategy for Europe, the Middle East and Africa, said the launch was in reaction to investors looking to get more granular with their US equity exposure.

“While a large proportion of those flows have gone into broad benchmarks, we’re seeing this increased demand and desire to be more specific in their views,” he said.

“Talking about overconcentration risk, there is also a concern that investors end up underweight these large names.”

Pybus added that the ETF would also appeal to retail investors, particularly those in German ETF savings plans.

BlackRock’s mega-cap ETF is more concentrated than Amundi’s, tracking the 20 largest companies in the S&P 500.

Amundi’s ETF tracks the MSCI USA Mega Cap Select index, which defines mega-cap stocks as companies with a market capitalisation over €185bn. The index comprises 37 stocks and is rebalanced on a quarterly basis.

Both ETFs applied the 20/35 rule for index-tracking Ucits funds, meaning they could invest in up to 20 per cent of assets in the same stock, rising to 35 per cent under “exceptional circumstances”.

However, investors continue to be wary of market volatility and fear that the so-called Magnificent Seven US technology stocks are overpriced.

Amundi is also seeking to serve investors looking to manage these concerns, launching the Amundi MSCI USA ex Mega Cap Ucits ETF alongside the mega-cap strategy.

Highlighting the demand, the €11.9bn Xtrackers S&P 500 Equal Weight Ucits ETF has continued its recent hot streak, pulling in €3.4bn of net flows in the month to November 19, taking its year-to-date inflows to €5.6bn, according to data from TrackInsight.

DWS and BlackRock have been tipped to launch index fund versions of their US equal weight ETFs in a bid to capitalise on the demand.

Despite concerns, some investors will be looking to capture the performance of the S&P 500, which has vastly outperformed the equal weight strategies.

The S&P 500 Top 20 index has returned 35.1 per cent year to date. This is compared with 24.3 per cent for the S&P 500 and 14.4 per cent for the equally weighted S&P 500 over the same period.

The so-called Trump trade has boosted this further, with Magnificent Seven stocks, which include Apple, Amazon and Tesla, rallying almost 7 per cent since the election, as at November 19.

“BlackRock and Amundi are looking to capture momentum-driven investors that believe the mega caps are going to push even higher and outperform the S&P 500,” the person added.

“If you believe the Magnificent Seven are going to rally hard, then these products are obviously better at capturing that.”