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ETF Edge: Nearly half of BlackRock’s Russell 2500 ETF is its Russell 2000 ETF

July 14, 2017
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This update corrects the day the iShares Russell 2500 ETF launched.

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A new exchange-traded fund from BlackRock’s iShares suit of funds launched this month. Its biggest holding by far? Another iShares fund.

The iShares Russell 2500 ETF












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 made its debut on July 7 and tracks an index of 2,500 mid and small-capitalization companies, an index that is an expanded version of another one also operated by Russell, the Russell 2000












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 . BlackRock also offers an ETF tracking that index, the iShares Russell 2000 ETF












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and investors buying the new fund are in a sense getting both.

That’s because the Russell 2000 ETF represents 42.8% of the portfolio of the Russell 2500 ETF, with the remainder of the portfolio made up of the additional 500 stocks made up in the larger index.

A spokeswoman for BlackRock, which operates the iShares line of products, said an expert wasn’t immediately available to comment on the composition of the fund.

ETFs hold baskets of securities, and it isn’t unheard of for one of the holdings to be another ETF. However, this is rare in index funds, which are designed to hold everything the underlying index holds, and in the same proportion. Presumably, the Russell 2000 ETF comprises the same weight in the 2500 fund that the combined components Russell 2000 would have held, and it is more efficient for the new fund to simply adjust the size of that holding, rather than making trades on hundreds of additional securities.

Related:This figure helps explain why so many active ETF managers underperform

That the additional 500 or so securities separating the Russell 2000 from the 2500 comprise more than half of the weight of the new fund means that they should have notably different performance. On Friday, the 2500 ETF rose 1.4%, while the Russell 2000 ETF ended up 0.2%.

The Russell 2000 ETF is one of the most widely traded on the market, with a 30-day average daily trading volume of 26.6 million shares. It also has about $37.5 billion in assets, though it has seen outflows of $2.67 billion thus far this year, second only to the SPDR S&P 500 ETF Trust












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