BlackRock’s iShares ETFs ‘In the Middle of a Price War’

July 18th at 9:03am by John Spence

BlackRock’s ETF unit iShares is by far the largest ETF provider in the world but rivals are chipping away at the leader’s market share by competing on cost, according to a report.

“They are in the middle of a price war whether they admit it or not,” said David Nadig, director of research at IndexUniverse, in a Reuters article this week.

Specifically, ETF competitor Vanguard is enjoying strong inflows to its low-fee funds. Vanguard ETFs often undercut iShares funds on expense ratios.

The head-to-head matchup between Vanguard MSCI Emerging Markets (NYSEArca: VWO) and iShares MSCI Emerging Markets (NYSEArca: EEM) is a striking example.

The two ETFs track the same emerging market index, but VWO has an expense ratio of 0.2% while EEM charges 0.67%.

Investors have pumped $7.4 billion into VWO this year as of June 30, according to data from the ETF Industry Association. Year to date, EEM has gathered net inflows of $693 million, according to the ETF Industry Association. In 2011, investors pulled $8.5 billion from EEM, while VWO recorded net inflows of $5.3 billion last year. [Vanguard, Bond Funds Dominating ETF Flows]

Investors and advisors clearly prefer the lower-cost Vanguard ETF for emerging markets. [Bargain Hunters Flock to Vanguard Emerging Market ETF]

Vanguard ETFs are structured as separate share classes of the firm’s existing index funds. [Vanguard Indexing Guru Gus Sauter on ETFs]

“If Vanguard has the same ETFs that are identical in makeup to iShares and two-third of the cost, it is my fiduciary responsibility to my clients to switch,” a financial advisor told Reuters.

“Many people underestimated the long-term value of the brand and the experience of Vanguard,” added Lee Kranefuss, industry consultant and former iShares chairman, in the story.

Vanguard is the third-largest ETF provider by assets but is gaining on rivals iShares and State Street Global Advisors.

At the end of June, assets in U.S.-listed iShares ETFs totaled $482.3 billion, according to ETF Industry Association data. State Street controlled $290.7 billion and Vanguard held $208.3 billion.

Together, the so-called ETF Big Three control a market share of 83.4%, according to Morningstar. [Energy, REITs Lead Inflows to Sector ETFs]

“ETFs are not commodities,” a BlackRock spokesman told Reuters. “Buyers care a lot about liquidity, brand, product quality and accuracy of exposure.”

So far in 2012 through the end of June, Vanguard ETFs have attracted net cash inflows of $29.6 billion, according to the ETF Industry Association, while iShares has gathered $16.2 billion and State Street has collected $10.3 billion.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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