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• EEM 83% Rate It
• VWO 100% Rate It

That's good for BlackRock.

But it's also good for investors, offering them some interesting new choices.

For years, iShares has had a problem. While its overall business has grown, it's been losing share-not assets, just market share-in its 'core beta' products-the plain-vanilla ETFs in categories where investors and advisors put most of their money:size-bucketed equities, broad bond portfolios, multicountry international funds.

The best-known example is the iShares Emerging Markets ETF (NYSEArca:EEM). A few years ago, EEM dominated emerging markets ETFs. As of July, 31, 2007, EEM had $17.5 billion in assets under management, while it closest competitor-the Vanguard Emerging Markets ETF (NYSEArca:VWO)-had just $2.2 billion in AUM.

But iShares had a problem. While EEM and VWO tracked the exact same index, EEM charged significantly more:0.75 percent per year at that time compared with just 0.35 percent for VWO. VWO also better tracked its index, using a full replication strategy versus iShares' optimized approach. Once investors figured this out, money flows strongly favored the Vanguard product. As of Oct. 11, 2012, VWO had $57 billion in AUM compared with 'just' $37 billion for EEM.

Many called on iShares to slash fees on EEM to compete, but that was a nonstarter for obvious financial reasons. Instead, it lowered fees on EEM incrementally over the years, from 0.75 percent in 2007 to 0.67 percent today, but to slash fees to Vanguard levels would have been too costly. With its 0.67 percent expense ratio, EEM currently generates $250 million in annual fees. Reducing its expense ratio to match VWO's (now just 0.20 percent) would have cost the firm $175 million a year .

Try getting that past the board of directors.

So instead, iShares has chosen to thread the needle.

Early today, it announced the launch of a new 'Core' brand of ETFs within iShares. To do so, it did two things:First, it cut fees on six ETFs, bringing those fees down to industry-leading or industry-competitive levels. Then, it announced plans to launch brand-new ETFs in four other 'core' areas of the market, including areas where it already had large, established funds.

The six funds it directly cuts fees on are listed below.

Generally, these are ETFs that were already low-cost, and have now just become a little cheaper. While the fee cuts do impact BlackRock's revenue, at current asset levels, the impact is modest:You're 'only' talking about losing $37.5 million in annual fees.

Now consider the ETFs where iShares launched competing products:

And there is the primary reason iShares didn't cut fees on these products.

The four existing ETFs in this space-including EEM, which I highlighted above-had huge assets and relatively high expense ratios. Had iShares simply cut the fees on the old funds, it would have sacrificed $259 million in annual revenue … far too much to handle. So instead, it's launching entirely new products.

Now, iShares can point to other reasons why it launched new funds in this space too. Take that new emerging markets fund:The old fund ( EEM ) tracks the MSCI Emerging Markets Index, which only offers exposure to the top 85 percent of the market capitalization of emerging market stocks. The new fund (IEMG) tracks the MSCI Emerging Markets GIMI Series, which includes all companies in the top 99 percent of the market-cap spectrum. In other words, the new fund includes small-cap exposure, something the old fund lacks.

The idea-one that we've suggested in the past-is to offer two flavors:A 'trading-focused' product in EEM, with huge liquidity and a very liquid basket; and an 'investing-focused' product in IEMG, offering broader exposure to the space.

Could a cynic argue that iShares should have cut fees on EEM for the good of investors? Sure. But BlackRock isn't in this just for its health.

In its new pricing strategy, it's struck a nice balance:offering investors ultra-low-cost options on high-quality indexes while protecting its core business and not killing its revenues.

Threading the needle indeed.

At the time this article was written, the author held positions in VWO. Contact Matt Hougan at MHougan@indexuniverse.com.

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