What it means
The iShares range began in 2000 under another owner and became part of BlackRock after an acquisition in 2009. Today it covers hundreds of funds, and the brand is one of the best-known names in exchange-traded investing.
An iShares fund typically follows an index, meaning it aims to hold the same securities as a published benchmark in similar proportions. The investor buys units on an exchange at a market price, and the fund's value is set by the net asset value, which is the value of its holdings minus liabilities, divided by the number of units.
The main attraction is cost. Because most funds follow an index rather than paying managers to pick winners, the annual charge, called the expense ratio, is usually far lower than that of an actively managed fund.
The cost is deducted from the fund's assets, so investors do not receive a separate bill. For a business, these funds can be used by a treasury team investing surplus cash in short-term bond funds, or by an owner building a diversified personal portfolio.
The choice depends on the risk the business is willing to take, how quickly it may need the money, and whether the fund holds assets whose price can fall in the short term. Two nuances matter.
The trading price on the exchange can differ slightly from net asset value, and the fund's return will differ slightly from the index it tracks because of costs and trading. Funds with the same label can also behave very differently, so always read the fund's own description.
Tax treatment is another point to check. Distributions paid by a fund, and gains made when units are sold, may be taxed differently depending on the type of fund, the country of the investor and how long the units were held.
A finance team should confirm the treatment with an adviser before building a fund holding into a treasury policy.
In practice
Real-world examples.
Example
A small software company has $250,000 of cash it will not need for two years. The finance director considers a short-term bond fund from the iShares range instead of leaving the cash in the bank. She sets a written policy limiting the amount at risk and reviews the fund's holdings each quarter.
Example
A self-employed designer wants a simple way to invest for retirement without choosing individual companies. She buys a broad share market fund from the iShares range each month. She treats the purchases as a routine, like paying a bill.
Example
A university endowment office uses a bond fund from the range as a quick way to adjust its exposure to government debt. The trade settles in the usual cycle for exchange-traded funds, and the office records the holding at market value at each reporting date.
Formula
Calculation
Net asset value per unit = (total assets - total liabilities) / number of units
Suppose a fund holds $500,000,000 of assets and has $5,000,000 of liabilities, with 10,000,000 units in issue. Net assets = 500,000,000 - 5,000,000 = $495,000,000. Net asset value per unit = 495,000,000 / 10,000,000 = $49.50. If the annual expense ratio is 0.20% and an investor holds $100,000, the yearly cost is 100,000 x 0.0020 = $200.Case study
Seen in the real world.
Oakhaven Engineering is an illustrative, fictional manufacturer with seasonal cash flow. After the busy season, its finance director found $1,200,000 sitting in a current account earning very little interest while the next big supplier payment was six months away.
She considered buying individual bonds, but the amounts were too small to build a diversified portfolio and the research time was not available. Instead she proposed holding part of the surplus in a short-term bond exchange-traded fund of the kind iShares offers, within limits approved by the board.
The fund gave diversification and daily liquidity, and the board agreed provided the holding was valued at market price every month-end. The illustrative lesson is that a fund does not remove risk, but it can package diversification at a low cost.
Watch out
Common mistakes.
- Treating an iShares fund as risk-free because it is a well-known brand, when its value rises and falls with the market it tracks.
- Ignoring the expense ratio, when even small percentage charges compound into a large cost over many years.
- Assuming all funds in the range behave alike, when a share fund, a bond fund and a commodity fund have very different risks.
Questions
People also ask.
Is an iShares fund the same as a mutual fund?
Not exactly; it trades on an exchange throughout the day at a market price, while a traditional mutual fund is bought and sold at a price set once a day.
What is the difference between market price and net asset value?
Market price is what buyers and sellers agree on the exchange, while net asset value is the value of the fund's underlying holdings per unit, and the two are usually close.
Who runs iShares?
BlackRock, a global asset manager, runs the iShares range and manages the funds within it.
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