iShares fee cuts pay off — with a little help from friends

Vanguard's index change giving advisers one more thing to think about

By Jason Kephart

Nov 2, 2012 @ 12:12 pm (Updated 12:25 pm) EST

ETFs, ishares, vanguard

BlackRock Inc.'s decision to cut the fees on several exchange-traded funds in order to appeal to the buy-and-hold crowd looks to be paying off.

BlackRock's iShares led all ETF providers with inflows last month totaling $7.77 billion, more than double The Vanguard Group Inc.'s $3.28 billion, which was second, according to data compiled by IndexUniverse.

Its biggest bounce came from the $33 billion iShares Core S&P 500 ETF Ticker:(IVV). The expense ratio on that fund was cut last month to 7 basis points, from 9. It had $2 billion in inflows, the most of any ETF and, even more impressively it did so while investors were pulling out of other U.S. stock ETFs.

U.S. equity ETFs had $11 billion of outflows in October, led by $7 billion of withdrawals from the $109 billion SPDR S&P 500 ETF Ticker:(SPY).

The iShares ETFs didn't just benefit from fee cuts though; there was seemingly some help from its rivals at Vanguard.

The iShares MSCI Emerging Markets ETF Ticker:(EEM) had the second-biggest inflows of any ETFs with $1.2 billion. Its expense ratio (67 basis points) was not among those reduced, but it benefited from Vanguard's announcement that its corresponding fund would track a different index.

The $57 billion Vanguard Emerging Markets ETF Ticker:(VWO), the most popular emerging-markets ETF of the past three-plus years was basically flat in October, according to IndexUniverse. Vanguard announced last month that it would be switching the fund's underlying index from the MSCI Emerging Markets Index to the FTSE Emerging Markets Index, along with a number of other changes to its international and U.S. equity ETF benchmarks.

The flip-flop in flows between the two largest emerging-markets ETFs is a stark reversal of recent history.

In September, prior to the index change announcement, the Vanguard ETF had $1.6 billion of inflows, while the iShares ETF had about half that.

The further back you look, the more dramatic the difference becomes. Over the three-year period ended June 30, the Vanguard ETF had $39 billion of inflows while the iShares ETF had $1.3 billion of outflows, primarily due to the difference in cost between the two, since they both tracked the same index.

Now that the Vanguard ETF is changing its index, investors have more things to consider, as reported.

The strong advantage iShares has in communicating with advisers also likely played a role in the success of its top two ETFs.

Almost 40% of advisers ranked iShares as the ETF provider with which they have the strongest connection, according to a new report by Cogent Research Inc.

“iShares has a long standing relationship with advisers,” said Linda York, research director at Cogent. “Whether they use the ETFs or not, they know the firm.”

Vanguard, meanwhile, ranked a distant fifth in the Cogent survey, behind Invesco PowerShares Capital Management LLC, State Street Global Advisors, and First Trust Portfolios LP.

“Vanguard's really more of a recent phenomenon among advisers,” Ms. York said. “It's an area Vanguard hasn't really focused on in the past.

Advisers' biggest beef with Vanguard was that it historically has paid little heed to advisers' preference for in-person visits. That doesn't come as much of a surprise, considering Vanguard's wholesalers were all based either in Scottsdale, Ariz., or its headquarters in Valley Forge, Pa., until late 2011.

Advisers want to talk directly to wholesalers when it comes to learning about new products and practice management, Ms. York said.

Over the past 18 months, Vanguard has deployed its wholesale force into the field to better communicate with advisers and has doubled its sales force to around 220. That means iShares will have to fight to keep its lead in the adviser space.

“We feel our relationship with the adviser community is strong and growing stronger,” said Vanguard spokesman David Hoffman.

BlackRock also has made some dramatic changes to its sales force. Last month, along with the ETF fee cuts, it announced it was combining its mutual fund and ETF sales teams into a single unit, the largest sales force in the industry.