“Although the direct fallout from Vanguard’s move is significant, it will pale in comparison if other ETF sponsors (BlackRock in particular) decide to follow suit. BlackRock is MSCI’s largest client, accounting for about 8% of MSCI’s total revenue. Within this pie, a large portion (about 80%) comes from fees based on ETF assets linked to MSCI’s equity indices,” said Shanmugasundaram, the Morningstar analyst.
“If BlackRock either decides to switch to a different service provider or use its own indices, it will be a devastating blow for MSCI. As with Vanguard, MSCI would be able to absorb any loss in revenue from BlackRock, but the impact on margins will be severe,” he added. “With BlackRock already talking about developing its own indices, we think MSCI is on shaky ground.”
However, Mark Wiedman, global head of BlackRock’s iShares, said the ETF manager plans to deepen its partnership with MSCI.
“MSCI is the gold standard of global and international equity indexes – the near-universal choice of professional investors,” Wiedman said in a statement Tuesday. [Vanguard Sets Showdown in Emerging Market ETFs]
Still, Vanguard’s index swap puts benchmark providers on notice that they can be fired by asset managers. The move could also encourage other ETF managers to negotiate lower index-licensing fees.
“Vanguard cited pricing as one of the main reasons to switch its index provider, which has now put pressure on MSCI to revisit its pricing policy. Given the fee war among ETF sponsors, and licensing fees comprising a large portion of a fund’s operating expenses, it wouldn’t surprise us if MSCI were to lower its fees,” Morningstar noted.
Standard & Poor’s Ratings Services on Tuesday said the Vanguard announcement does not affect its ratings on MSCI.
“This announcement does not affect our view of MSCI’s ratings or outlook. Although the Vanguard business represents a meaningful loss for MSCI’s asset-based fee business, both in revenues and prestige, it is a small part of the overall revenue base (under 3%) and EBITDA (near 5%),” S&P said. “Further, MSCI’s adjusted leverage, at about 2.3x as of the June quarter, is relatively modest for the ratings and we do not believe that the loss of the Vanguard revenues will affect its ‘intermediate’ financial risk profile nor its ‘adequate’ liquidity profile in the near term.”