By ETF Heat Map Team

As investing in high quality but low cost ETFs, such as BlackRock’s iShares ETFs, becomes more accessible, retail investors are seen to be the ultimate winners. BlackRock announced recently that it has lowered the cost ratios on its suite of fifteen Core ETF products. For example, the iShares Core S&P 500 ETF, listed as IVV, is going to be reduced from 7 basis points (0.07 percent) to 4 basis points (0.04 percent). Market participants gauge that this move is a direct challenge to the competitors in the growing and increasingly popular ETF investment space.

Some are suggesting that the reduction in costs is a calculated move to acquire more market share in the ETF market, as BlackRock tries to out maneuver competitors, prior to new fiduciary rules that will potentially benefit ETFs and other variations of passive investments becomes introduced.

The reduction in the investment management fee charged by ETF market makers, or put another way the decrease in expense cost ratios, is of great significance. Cost reductions mean that the annual expense of keeping $100,000 in the IVV ETF will run from $70.00 down to $40.00 annually. That is a huge deal in the ETF investing world. The S&P 500 ETFs are the most prevalent and largest type of ETF. The three major competitors, BlackRock, Vanguard, and State Street, provide very similar products however the amounts the charge are very different.

The expense ratios for the S&P 500 ETF offered by the top three competitors are as follows:

  • BlackRock’s iShares Core S&P 500 ETF: 0.04 percent (down from 0.07 percent)
  • Vanguard’s S&P 500 ETF: 0.05 percent
  • State Street Global Advisors’ SPDR S&P 500 ETF: 0.09 percent

banner3A great war looms on the horizon between titans such as: BlackRock’s iShares whose AUM exceeds $1 trillion USD, Vanguard, and State Street Global Advisors’ SPDR ETFs. BlackRock is the largest facilitator of ETFs since its acquisiton of iShares from Barclays many years ago. Together with State Street’s SPDR, and Vanguard ETFs, they manage approximately 80% of all U.S ETFs and 70% of all global ETFs as of April 2016.

The BlackRock iShares franchise is making a concerted effort to control the trillions of dollars of investor capital that is present in ETFs space.  The other ETF providers include J.P. Morgan ETFs, Wisdom Tree’s ETFs, First Trust’s ETFs, Charles Schwab’s ETFs, Guggenheim Investments ETFs, Deutsche Bank AWM X-trackers ETFs, Invesco PowerShares ETFs, and Van Eck Funds ETFs.

Salim Ramji, the Head of BlackRock’s U.S. Wealth Advisory business, stated, “This is another critical milestone to help advisors as they prepare for the major shift the DOL fiduciary rule requires — providing investors with quality index exposures at great value in the center of their portfolios”.

Despite this ongoing battle of the titans, the real winner, at least in the short term, will be the American investors who will be able to save more money by making investments in low expense ETFs.  Historically, competition usually is good for the consumer as long as price fixing or supply fixing between oligopolies (competition) does not occur. In the short to medium term, BlackRock’s announcement is favourable for investors.

Long term implications of this announcement are not yet known but new legislation, and potential industry consolidation through acquisition are threats ETF issuers face. Acquisition of another firm or another firm’s assets can be healthy in a competitive environment. Dave Nadig, the Director of ETFs for Factset commented by saying, “This is the first salvo in a race to the bottom to comply with the DOL requirements. These plain vanilla products are mostly the same. Why pay nine basis points when you can get the same product for four?”. In the meanwhile, retail investors can rejoice at the lower expense ratios courtesy of the largest ETF market maker.


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