BlackRock (NYSE: BLK) is a Play on Passive Investing

BlackRock NYSE: BLK, the largest asset manager in the world, has more than $7.8 trillion in assets under management (AUM). Nearly two-thirds of that figure is tied to index funds and exchange traded funds (ETFs). With passive investing all the rage these days and the market setting all-time highs, has BlackRock exhausted its growth opportunities?

Not even close.

ETFs Still Have Plenty of Room for Growth

It might seem like mutual funds are out of style. Why pay someone a 1% (or more) fee to manage your money, when you can either:

1. Do it yourself. The information is all out there, and it’s easy/cheap to manage your own portfolio.
2. Invest in index funds and ETFs, which often charge fees as low as one-tenth of one percent.

But change happens slowly in the investment industry, and mutual funds are still a $21 trillion business. The ETF industry, by comparison, recently surpassed $5 trillion in AUM. A surging market was largely responsible for the milestone, but over $400 billion in new money was invested in ETFs in 2020, well above 2019 inflows.

How big can the ETF market get? It won’t happen overnight, but $10 trillion seems realistic over the next couple of years. In the long run, the sky is the limit. Young people seem to prefer index funds or ETFs over mutual funds, so demographic shifts favor passive investing.

BlackRock’s iShares ETFs are 46% of the ETF Market

As of September 30, iShares ETFs had greater than $2.3 trillion in AUM. That works out to 46% of the $5 trillion ETF market. If BlackRock can merely maintain that 46% market share, it could see its overall AUM soar well above $10 trillion in the next few years.

But there’s a decent chance that BlackRock can increase its market share. In Q3, BlackRock’s iShares ETFs recorded $41 billion in net inflows, representing 8% annualized organic asset growth and 7% organic base fee growth.

On the Q3 earnings call, BlackRock’s CFO credited “continued momentum in fixed income and sustainable ETFs, two strategic product categories where we have leading market share” for driving net inflows.

Those two categories are exactly where you want to see momentum because they are two of the biggest growth opportunities in the ETF market.

 Let’s start with fixed income: BlackRock has $663 million in global fixed income ETFs, which equates to 47% of the $1.4 trillion global fixed income ETF market. The US bond ETF market, at around $1 trillion in AUM, accounts for most of that figure. But that $1 trillion still represents just 2% of the total US bond market. What happens if that number gets to 5%? Or 10%?

You can bet that BlackRock will continue to capture a large percentage of the new inflows. On the Q3 call, BlackRock’s CEO noted, “We saw record momentum around fixed income ETFs which continue to attract new users. iShares fixed income ETFs generated $20 billion of net inflows in the third quarter, and we have captured nearly 40% of industry flows year-to-date.”

Sustainable investing is starting from a smaller base – around $200 billion in both sustainable ETFs and index funds – but can turn into a large part of BlackRock’s business down the road. In April 2020, BlackRock released a study that spelled out the ESG opportunity, concluding that the market could grow nearly sixfold to $1.2 trillion by 2030.

As of Q3, Blackrock had around $127 billion in sustainable products (index and ETF). That was driven by $8 billion in inflows into sustainable iShares ETFs in Q3. In the first three quarters of 2020, BlackRock recorded $25 billion in inflows into sustainable ETFs, more than double the total for full-year 2019.

How Should You Play BlackRock?

BlackRock is currently trading at all-time highs and is reporting Q4 earnings tomorrow. Have expectations gotten too high ahead of the release?

If anything, expectations aren’t high enough. BlackRock is trading at 21.3x forward earnings, a bargain when you consider where this company could be in 5-10 years.

Shares are in overbought territory on the RSI, but could get a lot more overbought if BlackRock strikes the right chords tomorrow.