BlackRock has moved around €13bn of European-listed ETFs from optimised sampling to full physical replication, as the growing weight of major semiconductor and technology companies tests regulatory concentration limits.
Optimised sampling allows an ETF to track an index without holding every constituent. This can reduce trading costs and operational complexity, particularly when an index contains a large number of securities. However, an optimised UCITS ETF is generally limited to a maximum exposure of 10% to a single issuer.
Funds that fully replicate a recognised index can benefit from higher limits, allowing an individual holding to represent up to 20% of the portfolio – or 35% in exceptional market conditions.
The change follows strong performance from several companies linked to the expansion of artificial intelligence infrastructure. Micron Technology represented around 12% of the $7.4bn iShares
Edge MSCI World Value Factor UCITS ETF in May, while the fund was still using optimisation.
ASML, meanwhile, accounted for close to 10% of the iShares Edge MSCI Europe Quality Factor UCITS ETF, the iShares MSCI EMU Screened UCITS ETF and the iShares MSCI EMU CTB Enhanced ESG UCITS ETF. The three funds had combined assets of approximately €6.7bn.
Moving to full replication gives the ETFs greater scope to hold the same weightings as their benchmarks, reducing the risk that regulatory limits create a difference between the composition of the fund and the index it is intended to follow.
BlackRock told investors that the change was not expected to have a material effect on the management of the funds. However, full replication may require an ETF to trade and hold more securities, potentially adding costs and complexity. This tends to be less significant for large-cap, liquid indices than for emerging-market or smaller-company benchmarks.
The move reflects a wider issue for passive funds as gains become concentrated in a relatively small number of large technology and semiconductor companies. Approximately 30% of European-domiciled equity ETFs currently use some form of optimisation, according to Morningstar data cited by ETF Stream.
Our view
David Batchelor, senior analyst at QuotedData, said: “This change from BlackRock highlights how the AI boom is affecting more than the performance of ETFs – it is also beginning to influence how they are constructed and managed. Optimised sampling can help keep an ETF efficient, but it becomes harder to use when a small number of companies grow beyond the concentration limits available to the fund. Moving to full replication should allow the affected ETFs to follow their indices more closely, although investors should not assume the change removes the underlying concentration risk. It instead allows the funds to reflect that concentration more accurately”.
