How Lower Fees Impact iShares Core ETFs

In an announcement made Tuesday, BlackRock, Inc. (NYSE:BLK)'s iShares unit, the world's largest issuer of exchange-traded funds, said it is paring the fees on seven of its core ETFs, bringing some of the annual expense ratios on those funds to as low as 0.03 percent per year. That works out to be a mere $3 for every $10,000 invested.

The news extends a multi-year theme of ETF issuers paring fees to lure advisor and investor assets while putting iShares' rivals, such as Vanguard and Charles Schwab, on notice that the ETF giant is more than willing to compete on cost.

Just last month, State Street Global Advisors (SSgA), the third-largest U.S. ETF sponsor, lowered the annual expense ratios on its popular sector SPDR lineup, including the Energy Select Sector SPDR (ETF) (NYSE:XLE) and the Technology SPDR (ETF) (NYSE:XLK), to 0.14 percent a year from 0.15 percent.

iShares ETFs With Newly Lowered Fees

One of the ETFs iShares lowered fees on is the $2.7 billion iShares S&P 1500 Index Fund (ETF) (NYSE:ITOT), which now charges 0.03 percent per year. That prompted Schwab to say it will lower the annual expense ratio on the Schwab U S Large Cap ETF (NYSE:SCHX) to 0.03 percent from 0.04 percent.

As ETFs gather assets, it is routine for expense ratios to come down. Through September 2015, the iShares Core series gathered $63 billion since its creation. However, we think investors need to also understand how ETFs trade and what's inside, said S&P Capital IQ in a new research note.

The research firm highlights the $8.6 billion iShares Core MSCI Emerging Markets ETF (iShares Inc. (NYSE:IEMG)) as an example of the iShares core suite's asset-gathering proficiency. IEMG has been a hit with professional and retail investors, and now with a new lower fee of 0.16 percent per year, it is one of the least expensive emerging markets ETFs on the market today.

While the iShares Barclays Aggregate Bond Fund (NYSE:AGG) has been a success and is one of the largest bond ETFs in the United States, the core suite now has an international equivalent in the form of the iShares Core International Aggregate Bond ETF (NYSE: IAGG).

S&P Capital IQ sees IAGG as a credible competitor to the Vanguard Total International Bond ETF (Vanguard Charlotte Funds (NASDAQ:BNDX)).

IAGG takes a currency hedged approach to offering exposure to investment grade international bonds. However, the index IAGG will track has a lower issuer cap than BNDX, which we think will reduce the iShares ETF's exposure to Japanese sovereign bonds for example. We expect that the different exposures will impact the ETF's duration, yield and performance, said the research firm.

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