Thanks to the immense popularity of ETFs in recent years,
there has been a race to the bottom in the exchange-traded
fund business on the cost front for gaining market share.
Many ETF sponsors have reduced costs to make their funds the
cheapest in a particular category, heating up the competition in
the space.
Cost is an important element in selecting funds in the
portfolio, especially when two funds track similar, or even
identical, indexes. Generally, the low-cost product overtakes the
high-cost product and leads in AUM when cost is really the only
big difference between the two funds.
This trend has been especially important for iShares, despite
their solid performance this year as the company has pulled in
about $50 billion in AUM in the first nine months of the
year.
Though the firm has among the most in asset inflows, it is
losing share in large liquid funds to low cost ETFs managed by
Vanguard and other low cost providers like Schwab. Still, iShares
occupies about 41% of the U.S. market share with 276 funds in its
total lineup, a figure that is down from 48% reported in
2009.
As a result, iShares recently announced plans to cut the
expense ratio on six core ETFs, making them some of the cheapest
offerings in each of their respective categories. The cut follows
the latest fee reductions by Vanguard and Charles Schwab to boost
its assets inflows amid stiff competition (read:
Charles Schwab Slashes Fees on Entire ETF
Lineup
).
The products that iShares announced the cuts on are not
unimportant funds either, as iShares has slashed costs on two
important ETFs,
Core S&P 500 ETF
(
IVV
) and
Core S&P Total U.S. Stock Market ETF
(
ISI
), funds that now have expense ratios of just 0.07% per year,
making them some of the cheapest ETFs in any category (ISI's
ticker will change to ITOT as well).
Though IVV fails in comparison to
VOO
in terms of expense ratio by two basis points, the product so far
attracted $33.2 billion of assets compared to $5.7 billion for
VOO, suggesting that it could have a much easier time keeping
assets after this cut.
The other three ETFs -
Core S&P Mid-Cap ETF
(
IJH
),
Core S&P Small-Cap ETF
(
IJR
) and
Core Total U.S. Bond Market ETF
(
AGG
) - will now have expense ratios of 0.15%, 0.16% and 0.08%,
respectively. IJH is the low-cost choice in tracking the S&P
MidCap 400 Index, outstripping
IVOO
, a Vanguard product, which has an expense ratio of
0.17%.
Among the three funds tracking the S&P SmallCap 600 Index,
IJR and
VIOO
will be the cheapest funds in the category. On the other hand,
AGG is the cheapest fund after Charles Schwab's
SCHZ
that tracks the Barclays Capital U.S. Aggregate Bond Index. AGG
has so far managed assets of about $15.9 billion while SCHZ has
only $336.6 million in AUM (read:
Ten Biggest U.S. Equity Market ETFs
).
iShares also cut the expense ratio on
Core Long-Term U.S. Bond ETF
(
GLJ
) to 0.12% from 0.20% and decided to change the tracking index to
Barclays US Long Government/Credit Bond. Furthermore, the new
ticker name will be ILTB instead of GLJ.
The Vanguard product, Long-Term Bond ETF (
BLV
), tracks the same index and charges 11 bps in fees per year to
investors. We have seen that the Vanguard product has attracted
around $587 million more assets than iShares' product owing to
lower fees of 1 bps.
While these fee reductions are expected to take a toll on
iShares' revenue by $35-$40 million, it would boost more cash
inflows for the products. Further, the firm introduced four new
low-fee ETFs to its lineup in order to attract long-term
investors instead of cutting fees on the old funds (read:
Who Says iShares ETFs Aren't Cheap?
).
The new funds -
Core MSCI Total International Stock ETF
(IXUS),
Core MSCI Emerging Markets ETF
(IEMG),
Core MSCI EAFE ETF
(IEFA) and
Core Short-Term U.S. Bond ETF
(ISTB) - will have expense ratios of 0.16%, 0.18%, 0.14% and
0.12%, respectively.
These funds are similar to iShares' four existing ETFs - MSCI
ACWI ex US Index Fund (
ACWX
), MSCI Emerging Markets Index Fund (
EEM
), MSCI EAFE Index Fund (
EFA
) and Barclays 1-3 Year Treasury Bond Fund (
SHY
) that have expense ratios of 0.34%, 0.67%, 0.34% and 0.15%,
respectively.
Since these funds have a huge asset base and relatively higher
expense ratios, iShares might have lost $259 million in annual
revenue had it simply cut fees on them instead of introducing the
new products, suggesting that the San Francisco-based firm is
testing a novel strategy of new launches instead of cuts on at
least some of its funds.
This low-cost strategy may also bolster the firm's competitive
position against its rivals such as Vanguard, Charles Schwab and
State Street in a number of important ETF categories across a
number of asset classes.
This is an interesting plan that has immense ramifications for
the broader ETF world. It suggests that the fight for low-cost
products is intensifying and a number of issuers are coming up
with low fees as cheap funds attract more inflows. The approach
helps investors to build a diversified portfolio with lower cost
and higher returns.
For investors looking for a list of iShares fees changes, we
have highlighted the company's products below, by AUM, along with
their old and new expense ratios (see more on ETFs in the
Zacks
ETF Center
)
:
|
ETF
|
AUM (in millions) as of October 17
|
New Expense Ratio
|
Old Expense Ratio
|
|
IVV
|
$33,237
|
0.07%
|
0.09%
|
|
ISI/ITOT
|
$365
|
0.07%
|
0.20%
|
|
IJH
|
$11,421
|
0.15%
|
0.21%
|
|
IJR
|
$7,925
|
0.16%
|
0.22%
|
|
AGG
|
$15,893
|
0.08%
|
0.20%
|
|
GLJ/ILTB
|
$200
|
0.12%
|
0.20%
|
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ISHARS-BR AG BD (AGG): ETF Research Reports
(GLJ): ETF Research Reports
ISHARS-SP MID (IJH): ETF Research Reports
ISHARS-SP SC600 (IJR): ETF Research Reports
ISHARS-10+Y GCB (ILTB): ETF Research Reports
(ISI): ETF Research Reports
ISHARS-1500 IDX (ITOT): ETF Research Reports
ISHARS-SP500 (IVV): ETF Research Reports
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