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]

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