Inside ETFs Live iShares is rethinking index contracts

BlackRock unit eyes change to counter Vanguard's switch to flat fees

Feb 11, 2013 @ 1:36 pm

By Jason Kephart

+ Zoom
(Bloomberg)

BlackRock Inc.' iShares is reviewing its contracts with index providers in light of The Vanguard Group Inc.'s switch to flat fees for licensing indexes instead of paying a portion of exchange-traded-fund assets.

Nothing is “imminent, but it's something we're looking at and will continue to look at,” Mark Wiedman, global head of iShares, said Monday during a panel discussion at the IndexUniverse Inside ETFs conference in Hollywood, Fla.

The licensing fee that an ETF pays an index provider historically has been a percentage of assets that the fund gathers.

Such agreements rob ETFs of the benefit of economies of scale because the licensing fee doesn't go down as fund assets go up, even though the index provider's job doesn't get any harder, Joel Dickson, a senior investment strategist at Vanguard, said during the discussion.

Vanguard dropped MSCI Inc. as the index provider for 22 of its ETFs last fall to move to a fee-based licensing agreement with FTSE Group and The Center for Research in Securities Prices.

“We wanted to be able to return economies of scale to the investors,” Mr. Dickson said.

The original agreements greatly benefited index providers because in the early days of ETFs, having a well-known index brand gave an ETF credibility. That isn't necessarily the case anymore.

“The value is changing,” Mr. Wiedman said, adding that 10 years ago, ETF brands were weak, and index brands were valuable.

ETF brands have become stronger, though, giving the ETF providers more leverage.

In this case, iShares may have even more leverage to lower costs. After MSCI failed to come to a new agreement with Vanguard, its share price fell more than 20% to $28 a share, and it has yet to regain those losses.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

INTV

Vanguard's Joe Davis: Prepare for lower expected returns

The next five years will be more challenging for the markets than the past five, according to Joe Davis, global chief economist at Vanguard. Here's why it's more important than ever to stay reasonable with return expectations and stick to the plan.

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

SEC's Clayton says agency is 'pushing' toward a fiduciary rule, working with DOL

While Senate hearing focused on recent cyberbreach, SEC chairman highlighted fiduciary duty as 'a priority for me.'

10 things clients say that make you cringe

Sometimes clients say stupid things. Here are 10 classics.

HighTower faces pressure to let investors cash out

After an IPO planned for last year didn't happen, the company could opt to satisfy its backers with a sale.

Envestnet to buy FolioDynamix

The deal, which is expected to close in the first quarter of 2018, will bring the total assets Envestnet works with to almost $2 trillion.

Jerry Schlichter's fee lawsuits have left an indelible mark on the 401(k) industry

After a decade of litigation, fees are lower and retirement plans are more transparent. But have the lawsuits gone too far?

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print