On Monday, BlackRock's (NYSE:
) iShares unit, the world's largest ETF sponsor, made perfectly
clear to the ETF industry that it is not taking its rivalry with
Vanguard, or any other firm for that matter, lightly. In what is
arguably the biggest news of the year in the exchange-trade
iShares is making good on a promise to slash fees
on some of its most popular ETFs
The firm is also introducing a new suite of low-cost ETFs
aimed at buy-and-hold investors, a market demographic that has
been quick to warm to Vanguard and that firm's cheap ETFs. As
part of the effort to better compete with Vanguard on the cost
front, iShares will introduce the iShares Core Series, which will
be comprised of four new and six existing funds.
Here are some of the most important details investors need to
be aware of with iShares' new cost-cutting efforts.
The iShares MSCI Emerging Markets Index Fund (NYSE:
), the second-largest, emerging markets ETF, will remain as is.
EEM lost ground in recent years to the rival Vanguard MSCI
Emerging Markets ETF (NYSE:
) because the former charges 0.67 percent per year compared to
VWO's annual fees of 0.2 percent. However, EEM remains popular
with institutional investors.
To accommodate cost-conscious retail investors, iShares will
introduce the iShares Core MSCI Emerging Markets ETF on October
22. That fund will charge 0.18 percent. Do not be surprised if
Vanguard responds by trimming VWO's expenses, especially if the
iShares Core MSCI Emerging Markets ETF proves successful.
The iShares Barclays Aggregate Bond Fund (NYSE:
) will become the iShares Core Total U.S. Bond Market ETF on
according to the ETF's web page
. More importantly, AGG's fees will be pared to 0.08 percent from
This is significant because AGG will be modestly cheaper than
the Vanguard Total Bond Market ETF (NYSE:
). Both are far cheaper than the actively managed PIMCO Total
Return ETF (NYSE:
), which is aiming to steal assets from AGG and BND. AGG and BND
are passively managed.
The iShares 10+ Year Government/Credit Bond Fund (NYSE:
) will become the iShares Core Long-Term U.S. Bond ETF (NYSE:
ILTB). In addition to the ticker change, the "new" ETF will
charge 0.12 percent per year compared with GLJ's current expenses
of 20 basis points.
One of the Vanguard's most popular ETFs is the Vanguard Total
Stock Market ETF (NYSE:
). Home to almost 3,300 stocks, the fund is one-stop shopping for
investors looking for deep broad market exposure. With an expense
ratio of 0.06 percent, VTI is cheaper than 95 percent of
according to Vanguard
iShares is making a run at VTI by changing the iShares S&P
1500 Index Fund (NYSE:
) to the iShares Core S&P Total U.S. Stock Market ETF (NYSE:
ITOT) and shaving the ETF's fees to 0.07 percent from 0.2 percent
in the process.
Whether or not investors will flock to the iShares Core
S&P Total U.S. Stock Market ETF to save one basis point over
VTI remains to be seen. Perhaps the transition will be made
easier if the fund noticeably outperforms VTI.
Maybe this move is being saved for later, but iShares did not
announce fee reductions for any of its sector funds. That is
somewhat odd given that the fees on iShares sector ETFs are far
higher than what Vanguard charges. The select sector SPDRs are
even modestly cheaper than Vanguard's sector funds.
For example, the iShares Dow Jones U.S. Energy Sector Index
) charges 0.47 percent per year. That fund has almost $1.1
billion in AUM. The Energy Select Sector SPDR (NYSE:
) charges 0.18 percent and has over $7.7 billion in AUM.
There are two ways of looking at this situation. iShares could
be privately acknowledging it cannot compete with State Street
) and Vanguard on sector fund fees. Or iShares is saving some
ammunition for later and could unveil a significant fee reduction
on ETFs such as IYE at a later date. Only iShares knows the
Not Cut Part II
Aside from the creation of the core emerging markets ETF, iShares
did not unveil any fee reductions for its suite of emerging
markets funds. Excluding the VWO/EEM rivalry and a couple of
other isolated examples, iShares is by far the dominant purveyor
of emerging markets ETFs.
For countries that iShares does not have the first-to-market
advantage, think Indonesia and Russia, the firm usually undercuts
the existing fund on fee,
forcing that ETF's sponsor to consider fee cuts
of its own
For ETFs tracking countries where iShares has the first mover
advantage, the iShares MSCI Thailand Investable Market Index Fund
) and the iShares MSCI Chile Investable Market Index Fund (NYSE:
) being two good examples, the firm is already so entrenched and
its brand recognition so deep that fee reductions on these ETFs
are not necessary.
Said another way, any ETF issuer can create a new
Chile-specific fund, but the prospects for success are minimal
given that ECH is viewed as THE Chile ETF.
Bottom line: The only country-specific iShares emerging
markets ETFs that look like credible candidates for expense cuts
are the funds tracking Indonesia, Poland and Russia because Van
Eck's Market Vectors has three comparable funds that investors
have embraced. Investors probably should not expect the
fee-trimming craze to hit iShares emerging markets ETFs any time
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