Do not call it a price war. This is not the airline industry and ETF sponsors do not like such terminology. Whatever one decides to call it, this much is clear: BlackRock's (NYSE:BLK) iShares unit, the world's largest ETF issuer, will lower expense ratios on some of its funds in the fourth quarter. BlackRock CEO Larry Fink said as much Monday at the Barclays 2012 Global Financial Services Conference.
Neither Fink nor his firm identified specific iShares ETFs that would be subject to lower fees, but as Reuters reported, there are 15 investment themes where iShares has one or two ETFs that compete directly with a lower-cost option from Vanguard.
So right now it is speculation regarding which iShares ETFs will see lower fees. It is reasonable to expect the iShares MSCI Emerging Markets Index Fund (NYSE:EEM) will be one, but the reality is EEM's rivalry with the Vanguard MSCI Emerging Markets ETF (NYSE:VWO) is over. VWO, with its expense ratio of 0.2 percent, is so far ahead of EEM in terms of assets that iShares would have to make EEM's new fees less than 0.2 percent to have any hopes of making this a match-up worth watching.
Again, it is just speculation, but here are five iShares ETFs that look like reasonable choices for fee cuts.
iShares iBoxx $ High Yield Corporate Bond Fund (NYSE:HYG) This one is interesting because HYG is not part of the much ballyhooed and overrated iShares/Vanguard rivalry. Rather, BlackRock would do well to realize the SPDR Barclays Capital High Yield Bond ETF (NYSE:JNK) is cheaper by 10 basis points.
JNK trails HYG by $4.3 billion in assets under management, but it is worth remembering that once upon a time, VWO was smaller than EEM. HYG's 0.5 percent expense is high not only in comparison to JNK, but also when considering Van Eck, parent company of Market Vectors, has unveiled three ETFs with high-yield bond exposure this year all with net expense ratios of 0.4 percent.
Why run the risk of losing assets to rivals when a fee cut could prevent that scenario from coming to pass? That is the approach iShares should take to HYG.
iShares Barclays Aggregate Bond Fund (NYSE:AGG) Staying with the bond theme, the iShares Barclays Aggregate Bond Fund does have a real rivalry with a Vanguard product, that being the Vanguard Total Bond Market ETF (NYSE:BND). Both track the Barclays U.S. Aggregate Bond Index and both are among the largest U.S.-listed bond ETFs. Since both basically do the same thing, smart investors would logically opt for BND and its 0.1 percent annual expense ratio. AGG charges twice that.
iShares High Dividend Equity Fund (NYSE:HDV) Now with almost $2.1 billion in AUM, it is certainly fair to say the iShares High Dividend Equity Fund is one of the most successful ETFs to have debuted in 2011. HDV has backed up its ability to attract assets with a stellar performance, too. Since its April 2011 debut, HDV has simply crushed the Vanguard Dividend Appreciation ETF (NYSE:VIG) and the SPDR S&P Dividend ETF (NYSE:SDY) in terms of returns.
It is possible that investors will continue to pay up for HDV, but why run the risk? SDY is cheaper by five basis points (0.35 percent compared to 0.4 percent for HDV.) The comparison with VIG is attention-getting. VIG's expense ratio is just 0.13 percent.
iShares Dow Jones U.S. Real Estate Index Fund (NYSE:IYR) The iShares Dow Jones U.S. Real Estate Index Fund and the Vanguard REIT ETF (NYSE:VNQ) track different indexes, so to say these ETFs do exactly the same thing is not entirely accurate. For iShares, the problem is many investors are just going to look at the names of these two funds and assume the products are the same.
That meas IYR would do well to protect its turf with a fee cut. VNQ charges just 0.1 percent compared to 0.47 percent charged by the iShares offering. When the difference is that wide, the performance difference needs to be wider in favor of the more expensive ETF. That is not the case as VNQ has topped IYR over the past year.
iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSE:EMB) The inclusion of the iShares J.P. Morgan USD Emerging Markets Bond Fund on this list might come as a surprise to some, particularly because EMB does not have a Vanguard rival. It does, however, have a credible competitor in the form of the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSE:PCY).
EMB and PCY do not track the same index, but both offer investors exposure to dollar-denominated emerging markets sovereign debt. PCY is by no means small with $2.25 billion in AUM, but that is not even half of the $5.4 billion EMB has.
Size aside, PCY has several key advantages over EMB. First, PCY's trailing 12-month yield beats EMB by more than 30 basis points. Second, PCY has outperformed EMB by nearly 100 basis points in the past year. All that while having an expense ratio that is 10 basis points lower than EMB's.
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