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


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

"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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