BlackRock, Vanguard, and Others in Race-to-the-Bottom ETF Price War

By Sterling Wong  OCT 17, 2012 3:55 PM

BlackRock has announced a series of expense ratio cuts in response to similar measures by its competitors.


MINYANVILLE ORIGINAL For investors, now is as a good a time as ever to invest in ETFs, at least in terms of fees paid.
Thanks to increased competition, ETF providers have been cutting expense ratios in their race-to-the-bottom pursuit of investors in a fast-growing sector of the $12 trillion mutual-fund industry.
The latest to install a series of fee cuts is BlackRock’s (NYSE:BLK) iShares unit, which is slashing fees on four stock ETFs and two bond ETFs, starting today. For example, investors will now be charged just 0.07%, or $0.70 for every $1,000 invested, for owning the iShares Core S&P 500 ETF (NYSEARCA:IVV) and the iShares Core S&P Total US Stock Market ETF (formerly iShares S&P 1500 Index Fund) (NYSEAMEX:ISI). The expense ratios for the two in the past were 0.09% and 0.20% respectively. That makes the cost of owning the iShares Core S&P Total US Stock Market ETF comparable to that of owning the popular Vanguard Total Stock Market ETF (NYSEARCA:VTI), which has a 0.06% expense ratio.
Fees on the iShares Core S&P Mid-Cap ETF (NYSEARCA:IJH), the iShares Core Total US Bond Market ETF (formerly iShares Barclays Aggregate Bond Fund) (NYSEARCA:AGG) and the iShares Core Long-Term US Bond ETF (formerly iShares 10+ Year Government/Credit Bond Fund) (NYSEAMEX:GLJ) will also be cut.
With a newly reduced fee of 0.08%, AGG will be cheaper than a similar fund from Vanguard, the Vanguard Total Bond Market ETF (NYSEARCA:BND). Both AGG and BND are far cheaper than the PIMCO Total Return ETF (NYSEARCA:BOND). Both AGG and BND are passively-managed while the much-more expensive BOND is actively managed.
BlackRock’s fee changes come on the heels of similar cuts at rivals Charles Schwab (NYSE:SCHW) and Vanguard. Last month, Charles Schwab slashed expense ratios between 15% and 60% on 15 ETFs. Investors will now pay only 0.04% for owning the Schwab US Broad Market ETF (NYSEARCA:SCHB), setting a new industry low, compared to the old ratio of 0.8%. Meanwhile, Vanguard Group has also slashed expenses for 40 of the firm’s 64 ETFs over the past year, notes Businessweek. "There's definitely some tension in the industry," Todd Rosenbluth, an ETF analyst with S&P Capital IQ, told CNN Money. "Investors are moving out of mutual funds, and while some of their money is staying on the sidelines, some of it is making its way into ETFs. So the ETF pie keeps growing, and the providers are doing what they can to increase their share."
BlackRock will see annual revenue get cut by $35 million to $40 million with the expense cuts, but it was a move necessary to retain or increase its US market share. BlackRock is the largest ETF provider in the US, capturing 41% of the market at the end of September, but that’s a sizable drop from its 48% share in 2009.
State Street Global Advisors (NYSE:STT) has stayed second behind BlackRock with a steady market share of 25%, according to investment-research firm Morningstar (NASDAQ:MORN), while third-placed Vanguard has increased its share to 18% from 12% in the past three years, notes Fox Business.
Expect further expense ratio cuts in the future, Christian Magoon, CEO of Magoon Capital, tells CNN Money. "These decisions tend to have a ripple effect across the marketplace," Magoon says. "So far, we've seen the costs come down on the products that have a bulk of the assets. In the next wave, we should see expense ratios come down on products that are priced at a premium relative to the larger ETF."
While investors will certainly welcome lower fees, ETF providers have to be careful in a war of attrition. Firms "need a lot of assets under management in order to survive," Samuel Lee, an ETF expert at Morningstar, told the Wall Street Journal. "The profit margins are razor thin."

Twitter: @sterlingwong
No positions in stocks mentioned.

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