BlackRock slashes some ETF fees, offers cheaper options

NEW YORK Mon Oct 15, 2012 7:08pm EDT

NEW YORK (Reuters) - BlackRock Inc said on Monday it is slashing fees on six of its exchange-traded funds and introducing four new ETFs.

The firm's new ETFs include the iShares Core MSCI Emerging Markets ETF, which costs 0.18 percent, far less than the firm's existing iShares MSCI Emerging Markets ETF (EEM.P), which costs 0.67 percent and will still be available to investors.

The most significant fee cut on an existing ETF is on BlackRock's $362.5 million iShares Core S&P Total U.S. Stock Market ETF ISI.P, where fees are being trimmed from 0.20 percent to 0.07 percent.

Of its largest ETFs, the most notable cut is in the $15.72 billion iShares Core Total U.S. Bond Market ETF (AGG.P) from 0.20 percent to 0.08 percent, undercutting competitor Vanguard Group's comparable ETF, the $17.6 billion Vanguard Total Bond Market ETF (BND.P), which costs .10 percent.

Exchange-traded funds are baskets of securities like mutual funds, but they trade throughout the day on exchanges like individual securities.

BlackRock's move comes as low-cost competitor Vanguard Group has gained market share from BlackRock and competitor Charles Schwab Corp (SCHW.N) has slashed fees on some of its ETFs, in some cases to pennies.

Vanguard spokesman John Woerth said these new fee reductions can be attributed to "the Vanguard effect," of lowering costs in a product category or a market in which Vanguard competes. Last month, Vanguard's incoming chief investment officer Tim Buckley told Reuters that if competitors cut costs, they should expect Vanguard to cut even further. <ID: nL1E8KSKJT>

But BlackRock's decision to introduce a new, broader emerging markets ETF, instead of cutting fees on its existing $37.3 billion iShares MSCI Emerging Markets Index Fund (EEM.P) surprised some analysts.

"This lets BlackRock have an incredibly cheap emerging markets ETF in the marketplace, but not cannibalize these sticky assets in a heavily-traded fund," said Dave Nadig, director of research at IndexUniverse.

LOWER FEES

BlackRock has cut fees on a total of six ETFs: the iShares Core S&P Total U.S.Stock Market ETF ISI.P, the IShares Core S&P 500 ETF (IVV.P), the iShares Core S&P Mid-Cap ETF (IJH.P), the iShares Core S&P Small Cap ETF (IJR.P), the iShares Core Total U.S. Bond Market ETF and the iShares Core Short-Term U.S. Bond ETF (ISTB.L).

The iShares Core S&P Total U.S. Stock Market will have a new ticker, ITOT, effective October 17. That is also when the new fees take effect.

The firm also changed the index for the iShares Core Long-Term U.S. Bond ETF to the Barclays US Long Government/Credit Bond Index from the Bank of America Merrill Lynch 10+ Year US Corporate & Government Index.

Meanwhile, on October 22 the firm is introducing four new ETFs - three international ETFs and one short-term bond ETF.

The most notable of the new funds is the iShares Core MSCI Emerging Markets ETF, which costs 0.18 percent, below Vanguard's similar ETF, the Vanguard $57.4 MSCI Emerging Markets Index Fund (VWO.P), which costs 0.20 percent, and well below its existing emerging markets ETF, which costs 0.67 percent.

BlackRock decided to introduce a new emerging markets ETF, rather than cut fees on its existing ETF because it believes there is a strong following among institutional investors for this fund, the firm said in a statement.

"We believe EEM offers value to institutional investors with sophisticated and dynamic strategies, who tell us they use it frequently as a vehicle to execute specific investment trades," the firm said in its statement.

Meanwhile, the new ETF, the iShares Emerging Markets Equity ETF, may be better for long-term, buy and hold investors who are more price sensitive, the firm said.

"BlackRock understand they have been playing in a different game and they are now focusing more on retail investors," said Lucas Montgomery, an analyst at Bernstein Research.

VANGUARD's VWO VERSUS iSHARES EEM

By keeping EEM's fees in place, BlackRock is betting there will be an institutional following, particularly after Vanguard announced earlier this month that it would switch 22 of its index funds away from benchmarks provided by MSCI Inc (MSCI.N). The change affects Vanguard's $57.4 billion MSCI Emerging Markets Index Fund (VWO.P).

Most institutional investors are required to stick to investment mandates that track certain indexes.

The battle for assets between Vanguard's VWO and iShares' EEM has long been watched by industry experts and analysts, who say they will look on with interest to see how this new fund fares.

Vanguard's VWO, which has fees one-third that of the iShares competitor, has gained $39.9 billion in the past three years, as of September 30, BlackRock's EEM has seen $2.22 billion in investor money leave over the same period, according to Lipper, a Thomson Reuters company.

The iShares ETF also has underperformed the Vanguard ETF for the past one and three years, although the five year performance is identical, according to Lipper.

But by launching a new ETF instead of cutting fees on EEM, BlackRock can minimize revenue losses, said Tim Strauts, an analyst with Morningstar Inc (MORN.O).

BlackRock expects the fee cuts to trim revenues by $35 million to $45 million annually. Cutting fees on EEM could have losses more than three times that amount, analysts said.

The challenge for BlackRock may be in how to market two similar ETFs to different audiences.

"I think it's going to be strange for iShares to talk about emerging markets and have two ETFs that are very similar with dramatically different fees," Strauts added.

(Reporting by Jessica Toonkel; Editing by Gary Hill, Leslie Adler, Jennifer Merritt and Andre Grenon)

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