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Funds News

BlackRock's iShares ventures into quant strategy ETFs

* iShares files to open 2 “minimum volatility” ETFs

* Firm’s first quantitative equity strategy funds

* Fees, ticker symbols not included in initial filing

BOSTON, Jan 26 (Reuters) - BlackRock's BLK.N iShares exchange-traded fund unit filed to open two quantitative equity strategy funds, the market leader's first foray into that type of offering.

The planned new products, the iShares MSCI USA Minimum Volatility Index Fund and the iShares EAFE Minimum Volatility Index Fund, will aim to reduce losses from the stock markets' worst periods using mathematical techniques developed by index provider MSCI Inc MSCI.N.

The EAFE fund covers developed markets of Europe, Asia, Australia and the Far East.

BlackRock’s iShares unit, with $571 billion under management, is the world’s largest ETF provider but has historically stuck with more straightforward index-based products.

The filing with the U.S. Securities and Exchange Commission did not include management fees or ticker symbols for the two proposed funds. BlackRock and MSCI declined to comment.

The track record of the underlying MSCI minimum volatility indexes shows the strategy can reduce losses but also forfeits some gains.

Over the past three years, the MSCI EAFE Minimum Volatility Index lost an average of 6.01 percent per year compared to an average annual loss of 9.72 percent for the standard MSCI EAFE Index. But in the fourth quarter of 2010, when the standard index gained 6.23 percent, the minimum volatility version rose just 2.41 percent.

And research done by Goldman Sachs Asset Management that considered how the volatility minimization strategy would have done over the past 20 years found long periods when investors were worse off.

The strategy would have gained only 76 percent in total for the five years ended December 31, 1999 compared to a 263 percent gain for the S&P 500, for example.

Overall, the Goldman study found that a volatility minimization strategy would have generated higher profits with less risk from 1990 to 2010. That was because of much smaller losses in the aftermath of the tech bubble from 2000 to 2003 and during the credit crisis of 2008 and 2009.

Morningstar analyst Samuel Lee said there is substantial academic research backing the approach. But he warned that some quant strategies have lost effectiveness when they became more widely used.

“There’s a possibility the profitability of the strategy will decline,” he said. “Sometimes a new ETF can signal there is too much interest in it.”

Quantitative strategy ETFs from other firms have had a mixed track record, according to Roger Nusbaum, chief investment officer at wealth manager Your Source Financial in Phoenix, Arizona.

“If they work the way they are supposed to they can be democratizing in terms of offering sophisticated strategies to individuals,” Nusbaum said. “The negative is that these funds don’t always work as advertised at the time they are most needed.” (Reporting by Aaron Pressman; Editing by Tim Dobbyn)

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