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iShares Firing Back With Planned ETF Fee Cut


BlackRock's (NYSE: CEO) Larry Fink said today that his firm, the parent company of iShares (the world's largest ETF sponsor) will reduce fees on some of its largest ETFs. These cuts will occur in the fourth-quarter as an atempt to address lost market share. iShares ETFs typically feature higher annual expense ratios than the comparable products issued by State Street's (NYSE: STT) State Street Global Advisors unit and Vanguard, the second- and third-largest U.S. ETF issuers, respectively.

As of September 5, iShares had over $500.6 billion in ETF assets under management while SSgA had almost $300.3 billion. Vanguard was next with $220.5 billion, according to Index Universe data.

One prominent example of where Vanguard has been able to pilfer assets from iShares with a lower-cost product is among emerging markets ETFs. Specifically, Vanguard's MSCI Emerging Markets ETF (NYSE: VWO) is now the largest ETF tracking developing nations with $54.8 billion in assets under management. VWO charges just 0.2 percent per year compared to 0.67 percent charged by the $35 billion iShares MSCI Emerging Markets Index Fund (NYSE: EEM).

While SSgA and Vanguard, among others, have pared fees on some of their most popular ETFs, iShares has not announced major fee reductions to this point. While many iShares ETFs are popular with retail investors, the firm's products are also have a loyal following among institutional users of ETFs. Since many of those institutions trade in and out of ETFs on shorter time horizons, the impact of annual fees is diminished compared to the effects felt by retail investors with long-term holding periods.

There are 15 themes where iShares has one or two products that compete against Vanguard, Reuters reported. Fink, who made the comments at the Barclays 2012 Global Financial Services Conference, did not name specific funds that would be subject to lower fees.

While there is evidence to suggest Vanguard has been able to swipe some ETF assets from iShares because of lower fees, it can be argued an iShares/Vanguard rivalry is overstated. Not just because iShares is still more than twice as big as Vanguard in terms of ETF assets, but also because those that trump this supposed rivalry ignore some key facts. The first being that Vanguard needs to pass SSgA before passing iShares.

Second, SSgA's select sector SPDRs funds have lower expense ratios than the comparable Vanguard ETFs. Said differently, those looking for an ETF battle might do well to pay more attention to Vanguard/SSgA than iShares/Vanguard.

For more on ETF issuers, click here.


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