iShares, the ETF behemoth that has steadily been losing market share to low-cost provider Vanguard over the past few years, may find that cutting prices on its funds is the most direct way to combat the Vanguard challenge, but don’t expect anything too dramatic or comprehensive, according to Bernstein Research.
An aggressive, across the board, price-cutting campaign is likely to be too risky to undertake, as the efficacy of competing on price alone is questionable, Bernstein ETF researchers wrote in a report published Wednesday.
“The nature of competition is multi-dimensional and depends on the user segment and the specific product,” the report said. “Thus, an across the board price cut would seem unjustified, as it could fail to generate market share gains and would simply damage the firm's earning power.”
In the past few years, retail investors in particular have turned increasingly to Vanguard ETFs instead of similar—and more expensive—funds offered by San Francisco-based iShares. While the trend extends to numerous competing and similar funds, the asset-gathering battle of the two firms’ huge emerging markets ETFs became the ultimate metaphor for the broader story.
We closely documented the slow and steady way that the Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO) was catching up to the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM). In January 2011, VWO finally became the biggest developing markets fund, and VWO now has $53 billion in assets, while EEM has $34 billion.
While the reasons behind the slippage for EEM relative to VWO are, as Bernstein wrote, more complex than just price alone, the researchers argued in the note that “in our view the only immediately actionable change in strategy would be price cuts.”
While many examples aren’t quite as stark, VWO has an annual expense ratio of 0.20 percent compared with 0.67 percent for EEM—a significant difference over time for long-term investors.
Officials at iShares and its parent BlackRock (NYSE: BLK) have been reluctant to openly acknowledge the competitive significance of price disparities of its products relative to Valley Forge, Pa.-based Vanguard’s.
But at the end of the second quarter on a call to discuss the company’s earnings, BlackRock Chief Executive Officer Larry Fink said the Vanguard threat was serious, and said his firm had a plan to address the problem. Bernstein noted that no further details have emerged.
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