3 Ways iShares Core ETFs Deliver for Advisors

• iShares Core ETFs have historically delivered competitive performance in a low cost, tax-efficient wrapper.
• Advisors may benefit from a practice management standpoint by lowering the overall cost of building a portfolio and reframing the performance conversation.
• iShares Core ETFs are built to work together in a modular fashion, helping advisors be master portfolio builders by avoiding style drift or unintended tilts.

While everyone wants hot stock tips, the best advisors know what clients really need: A well-constructed, diversified portfolio that aims to generate strong after-tax returns.

iShares Core ETFs can help with that, and more. Here are three ways Core strategies can help clients and can simultaneously help advisors grow their business.

Clients who stick to the plan, will likely stick with you: iShares Core equity ETFs’ combination of low cost, tax efficiency and competitive performance can help clients stay invested – and stay on course to pursue their long-term objectives.

For example, the iShares Core S&P 500 ETF (IVV) 1-, 5-, and 10-year ranking in the US Fund Large Blend category is 26%, 21% and 10% out of 1430, 1191, and 897 funds, respectively, according to Morningstar.¹ iShares Core Equity ETFs may help reduce "performance envy" or underperformance relative to a benchmark. Client meetings that aren’t dominated by discussions about relative returns can have more time to discuss important matters such as budgeting, tax management, or estate planning.

This may also benefit advisors from a practice management standpoint: Advisors who help their clients save money and grow portfolios tend to be advisors who keep those clients for the long-term.

Indexing has been anything but average

Growth of hypothetical $100,000 over the period 5/22/2000 to 6/30/2023

In a world where clients are expecting more, and want to pay less, lowering fees on investments is one potential way advisors can better serve clients. Using iShares Core ETFs is one lever advisors may pull to help keep clients’ overall costs down, while still pursuing performance.

Of course, some clients don’t want to “settle for average” returns, and surely clients want to keep their tax burden as low as possible, iShares Core ETFs have been anything but average. They’ve shown an ability to produce strong returns while limiting taxes. Combining the structural efficiencies of ETFs with a low turnover index strategy can help clients keep more of what they earn as the potential effects of taxes can be more detrimental to portfolio returns than fees.

Consider:

• Over the past five years, 0% of iShares U.S. Core equity ETFs paid out taxable capital gains distributions, compared to 78% of U.S. active equity mutual funds.²
• The average annual tax cost for active U.S. large-cap mutual funds was 2.12% for the 10 years ending in 2022 more than double their average annual expense ratio of 0.85%.³
• With a 2.12% annual tax, a hypothetical $100,000 portfolio would have suffered a tax drag of nearly $50,000 after a decade of 11% average annual returns.

iShares Core ETFs are designed to serve as the ‘foundation’ of portfolios. Advisors may use Core ETFs to create their own “model” portfolios, consisting of Core ETFs along with an advisor’s favorite active funds and stock picks.

Creating active asset allocations may help advisors scale their business, as these “Core-plus alpha” portfolios can be used for multiple clients.

In addition, they can help solve one of the most important challenges in investing: getting the asset allocation right for a client’s individual risk tolerance and time horizon. How much to put in stocks vs. bonds may matter more than whether you pick stock fund A vs. stock fund B.

One of the key use cases for iShares Core ETFs is filling an asset allocation without risk of style drift or gaps in exposure.

Advisors know clients are getting large-cap U.S. stocks when they use an S&P 500 index fund. However, actively managed large-cap funds may drift into other areas based on where the manager sees opportunities. Skilled managers can add value with these tilts, of course, but it could alter the clients’ overall asset allocation when other portfolio holdings are considered.

Core ETFs are designed to deliver exposure to a target market without tilts or unintended biases, which is critically important if an advisor’s portfolio-building effort is spent mostly on getting the model right.

Using the “right” index ETFs is an active decision. It’s important to understand not all indexes are created equal, and to be careful of mixing and matching indexes from different providers. Two popular mid cap indexes, for example, have almost nothing in common and just a 0.5% overlap. One has zero overlap with the S&P 500, the other includes 260 stocks in the S&P 500 ⁴.

iShares Core ETFs are designed to be complimentary and are built to work together in a modular fashion to build a strong portfolio foundation, providing precise exposure to large-, mid-, and small-cap stocks, respectively, without any gaps or overlaps.

The opportunities and risks described above can occur on the fixed-income side of portfolios too. Active bond fund managers can take opportunistic tilts that may add value but can also create gaps or unintended overlap in the context of a client’s whole portfolio.

In sum, iShares Core ETFs provide three key benefits to clients – potential for competitive performance, tax efficiency, and low cost – which in turn help advisors better serve clients and potentially grow their practice.