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, but the company is confident that its products still pack the bigger punch.
This month BlackRock Inc., said that it is planning to make strategic fee cuts to its iShares exchange-traded funds,
Vanguard's biggest competitor in the 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 compete. 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.
COMPANY'S REPUTATION
BlackRock, the largest provider of ETFs with just over $500 billion of assets, is expected to reduce 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.
“Low-cost investing isn't a Johnny-come-lately strategy for us, it's not a loss leader strategy,” Ms. King said. :It's part of our DNA.”
Christine Hudacko, a spokeswoman for iShares, declined to comment.
Vanguard is able to offer such low expenses because 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.
Still, it is no surprise that BlackRock is trying to keep up with Vanguard, which has less than half as many ETF assets. Investors have shown a clear preference not just for low-cost passive options, but the lowest-cost options.
In fact, Vanguard's dominance in the core categories has nearly doubled its market share to 20% since 2009. Meanwhile, BlackRock's share has fallen to 40%, down from 48%.
According to an AllianceBernstein LP report, Vanguard received 70% of the inflows into the 15 categories in which it competed with BlackRock over the past three years.
Meanwhile, Vanguard's mutual funds, largely index funds, took in $70 billion through the end of last month, almost twice that of its ETFs.
Advisers are certainly interested in what BlackRock does with its funds.
Matthew Reiner, chief investment officer of Wela Strategies LLC, said that 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.
jkephart@investmentnews.com Twitter: @jasonkephart
