The Vanguard Group Inc. — a long-time champion of low-cost investing — is about to face its first real competition in more than three years. And the indexing heavyweight isn't pulling any punches in sizing up its rival.
Earlier this month, that rival,
BlackRock Inc., announced it was planning on making strategic fee cuts to its iShares exchange-traded funds, Vanguard's biggest competitor in the fast- growing ETF industry.
BlackRock hasn't come forward with specifics yet, but the fee cuts are widely expected to target the 15 asset classes where the two giants clash head-to-head.
Those asset classes also happen to be the most lucrative core-portfolio categories such as broad-based equities and bonds, emerging markets and real estate investment trusts.
BlackRock, the largest provider of exchange-traded funds with just over $500 billion of assets, is expected to cut its fees to less than, or equal, the cost of the Vanguard ETFs. Without the edge on expenses, Vanguard management is counting on the company's reputation to keep advisers investing.
“If price is taken out of the equation because it's a neutral factor, the track record of the company starts to matter,” said Martha King, managing director of Vanguard's Financial Advisor Services division.
“Are you going to choose the company that's shown a decades-long commitment to low-cost [investing] or the one that just changed its stripes?” she asked. “Vanguard can only do what Vanguard does best. Low-cost investing isn't a Johnny-come-lately strategy for us, it's not a loss leader strategy. It's part of our DNA.”
Christine Hudacko, a spokeswoman for iShares, declined to comment.
Vanguard is able to keep its expenses low because of its unique ownership structure. The firm is owned by its funds, and thus the shareholders of those funds, so the expense ratios are kept at cost. As the funds grow larger, the expense ratios fall because of economies of scale. In fact, two-thirds of Vanguard ETFs have seen fee cuts over the past year thanks to ballooning assets.
No surprise
Still, it's no surprise that BlackRock is making moves to try to keep up with Vanguard, which has less than half as many ETF assets. Investors have shown a clear preference for not just low-cost passive options, but the lowest-cost passive options.
In fact, Vanguard's dominance in the core categories has nearly doubled its market share to 20% since 2009. BlackRock's share has likewise fallen to 40%, down from 48%, over the same time period. According to an AllianceBernstein LP research report, Vanguard received 70% of the inflows into the 15 categories in which it competed directly with BlackRock over the past three years.
Of course, ETFs are just a piece of Vanguard's surge in the aftermath of the financial crisis. Its mutual funds, largely of the index variety, have taken in $70 billion through the end of August, almost twice that of its ETFs. The two investment vehicles combined have attracted more than $100 billion of the $300 billion that has been invested, or roughly $1 out of every $3, through the end of August.
With today's low returns, the emphasis on costs have never been greater. Vanguard's ETF lineup has an asset-weighted expense ratio of 13 basis points, 20 basis points lower than iShares, according to Morningstar Inc.
Advisers are certainly interested. Matthew Reiner, chief investment officer of Wela Strategies LLC, said he would rethink his strategy if the new iShares fees are on a par with Vanguard's.
“We'd have to take a lot deeper look at our Vanguard holdings,” he said.
