iShares takes next step to woo retail investors, fend off Vanguard

BlackRock's ETF unit extends its core series to include managed portfolios

Sep 11, 2013 @ 1:54 pm

By Jason Kephart

BlackRock Inc.'s exchange-traded-fund arm iShares is extending its popular core series to include managed-ETF portfolios as it continues to ramp up efforts to court mom-and-pop investors and stave off a charging Vanguard.

iShares, the largest ETF company, has always been a favorite among institutional investors, but last October, it launched its initial wave of low-cost “core” ETFs to better reach retail and buy-and-hold investors.

The expanded focus came about as The Vanguard Group Inc., the third-largest ETF company and best known for its low-cost products, was rapidly gaining market share.

Vanguard's market share has risen to 19%, from 9% in 2009, while iShares has seen its share slip to 40%, from 47%, according to Morningstar Inc.

Vanguard has continued to increase its ETF assets rapidly this year.

It took in $36.6 billion in new money through the end of last month, more than double iShares' $17.3 billion in net deposits, according to Morningstar.

The core series, 10 low-cost building-block ETFs that include traditional large-cap, international and bond exposure, has struck a chord with investors so far.

The 10 ETFs, which include classic building blocks such as large-caps, international stocks and U.S. bonds, have grown to almost $100 billion, from $73 billion at the beginning of the year.

The newly proposed managed-ETF portfolios will be ETFs of ETFs and focus on target risk allocations. The iShares Core Allocation Moderate Growth ETF, for example, will use a combination of iShares ETFs to construct a traditional portfolio of 60% stocks and 40% bonds.

Conservative, moderate and aggressive growth ETF portfolios are also planned.

The initial filings with the Securities and Exchange Commission didn't include expense ratios, but given the core series' focus on low costs, it would be surprising if the ETF portfolios weren't cheaper than comparable mutual funds.

The average moderate allocation mutual fund, for example, has an expense ratio of 89 basis points, according to Morningstar.

Target allocation mutual funds have been always been popular with retail investors and smaller investors who use financial advisers, but iShares may have its hands full converting them to a target allocation ETF, said Jeff Tjornehoj, senior research analyst at Lipper Inc.

“If you're a retail investor you usually like ETFs for the tradability,” he said.

The growing number of fee-only advisers, however, could find the allocation ETFs more appealing than mutual funds, Mr. Tjornehoj said.

“It's cost-effective for investors who are too small to warrant extensive portfolio building,” he said.

Melissa Garville, spokeswoman for iShares, declined to comment while the ETFs are in registration.

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