Jeff Benjamin

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Behind BlackRock's latest salvo in ETF price ... contretemps

Fee cuts are part innovation, part marketing brilliance; don't call it a war, though

Oct 18, 2012 @ 11:04 am

By Jeff Benjamin

It has become almost a weekly news bulletin lately that some big-name provider of exchange-traded funds is introducing a new way to cuts fees.

Even though ETF industry gurus don't like to call it a “price war,” because they say companies cut fees all the time, it clearly amounts to some kind of dust-up.

The latest example came earlier this week when BlackRock Inc. coupled a fee-cut announcement with the rollout of the iShares Core Series, perhaps suggesting that simple fee cuts are already becoming passé.

Remember, this followed the move by the Vanguard Group Inc. two weeks ago to swap out of several underlying indexes for lower-cost benchmarks.

What's next, a fee cut paired with a commitment to eat more vegetables?

But I digest.

The BlackRock announcement could be described as part innovation and part brilliant marketing. For instance, instead of just cutting fees across the whopping iShares ETF lineup, the company carved out a new subcategory of 10 lower-cost funds, which includes tweaks to six existing ETFs and the addition of four new ETFs.

“As we look to build on our market-leading position in the ETF industry, we are taking a number of steps to further bolster our value proposition for investors,” said Mark Wiedman, BlackRock managing director and global head of iShares.

“The combination of our iShares Core Series brand, supported by what will now be the industry's largest U.S. sales force, are key components of our broader plan to drive even stronger growth in the U.S. and globally,” he added.

Tom Lydon, president of Global Trends Investments, pointed out that the combination of the iShares and BlackRock sales forces is no small thing, but he also likes the way the company has returned a volley in the ETF non-price war without resorting to an across-the-board fee cut.

“It's a unique strategy that shows BlackRock coming back from a competitive standpoint,” Mr. Lydon said.

From a distribution perspective, the buy-and-hold sales pitch behind the new Core Series could make the ETFs an attractive fit for college-savings and company-sponsored retirement plans.

“This is interesting because it's the first time I've seen a series targeted to a specific audience, and it's almost like they've created a different share class,” said Paul Justice, fund analyst at Morningstar Inc.

A key point to ponder, according to Mr. Justice, is that by dubbing the new series of broad-market index ETFs “core” investments, BlackRock could be inviting some questions it might not want asked.

“It seems like they're basically saying until now the other ETFs were never meant to be core,” he said.

Maybe it's not such brilliant marketing, after all.

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