BlackRock to lower fees on some ETFs to better compete

NEW YORK (Reuters) - BlackRock Inc will announce lower fees on some of its core iShares exchange-traded funds in the fourth quarter to better compete with lower-cost products, Chief Executive Laurence Fink said on Monday.

The changes will only apply to some ETFs with lower-fee competition and will not be a "wholesale fee change on everything," Fink told attendees at the Barclays' Global Financial Services Conference in New York.

Exchange-traded funds are baskets of securities, like mutual funds, but they trade on exchanges, like individual securities. They carry lower fees than mutual funds and trade throughout the day, with simultaneous pricing, unlike mutual funds, which price at the end of the day.

Over the past few years, BlackRock's iShares ETFs have been losing U.S. retail market share as Vanguard Group has aggressively rolled out cheaper ETFs.

BlackRock's $501 billion of iShares ETFs made up 40.6 percent of the $1.23 trillion U.S. ETF market as of August 31, down from 46.6 percent two years ago, according to IndexUniverse LLC, which tracks ETFs.

Meanwhile Vanguard's $221.4 billion of ETFs made up 17.9 percent of the U.S. ETF market as of August 31, up from 13.9 percent two years ago.

"There are a number of products where the competition is accelerating their sales numbers versus ours and we are going to address that on those few products," Fink said in his keynote speech Monday morning.

In 15 instances, one or two ETFs compete directly with Vanguard ETFs but cost more, according to a recent report by Bernstein Research. In all of those categories, Vanguard is taking business away from BlackRock.

Most notably, one of BlackRock's biggest ETFs, the $35 billion iShares MSCI Emerging Markets Index Fund, had a net inflow of $293.2 million in the three years ending August 31, according to IndexUniverse.

Meanwhile, Vanguard's comparable ETF, the $54.8 billion Vanguard MSCI Emerging Markets ETF, had net inflows of $42.8 billion over the same period. The Vanguard ETF costs 0.47 percentage point less than the iShares ETF. That represents roughly $287 million in lost revenue from investor money that went into Vanguard's ETF instead of the iShares ETF.

"If I were to guess where they are looking to cut fees, I would guess that is one," said Luke Montgomery, an analyst at Bernstein Research.

Despite its plans to reduce its fees on some ETFs, BlackRock still expects margins to grow to more than 40 percent in the near future, Fink said.

"Those products are going to have reduced fees and reduced margins... but we still have increasing margins in some of our other ETF products," he said. "The key is about building out more innovative products."

If BlackRock can reduce fees around those ETFs that compete with Vanguard's to be within 10 basis points, that could help in winning new money when investors are choosing between the two firms' ETFs, said Paul Justice, director of ETF research at Morningstar.

"As long as you are that close, people don't feel like it's really going to impact their long-term returns," he said.

BlackRock shares were down about 1 percent at $180 in mid-day trading.

(Editing by Gerald E. McCormick, Lisa Von Ahn, Dan Grebler and Steve Orlofsky)