Nadig: iShares Winning Fee War With Itself

July 07, 2014

How BlackRock's iShares is seemingly battling itself with competing funds—and winning.

I will admit I was puzzled by the launch of iShares' Core series back in October 2012. Let me paint you a scenario: I have a goose that lays golden eggs. Every day, as long as I feed it corn, it lays a golden egg. But I only have one bag of corn a day, so I only get a golf-ball-sized egg.

Then I tell you I've found this other goose that lays eggs made out of tin. But I love this goose so much that I'm going to adopt it, put it next to the awesome gold-laying goose and share the corn.

You'd say I'm insane. And you'd be right. You could also say I'm iShares.

In October 2012, BlackRock launched its tin-laying goose series, known as the iShares Core. The concept of the iShares Core is simple: easy to understand, low-cost exposure to core asset classes. It was in direct response to the success Vanguard and Schwab had had with similar products, and a recognition that ETFs were increasingly being used not just as trading vehicles, but as the bedrock of entire long-term portfolios.

All well and good. But how they went about it was interesting. They rebranded some funds, like the popular iShares S&P 500 fund (IVV | A-98) by just sticking "Core" after the "iShares." But with other funds, they launched brand new funds with nearly identical exposures, at lower fees.

The three real head-scratchers were competitive products to the iShares MSCI ACWI ex U.S. ETF (ACWX | B-97), the iShares MSCI Emerging Markets ETF (EEM | B-99) and the iShares MSCI EAFE ETF (EFA | A-91).

iShares Core Launches

Name Ticker Expense Ratio
iShares MSCI ACWI ex. U.S. ETF ACWX 0.33%
iShares MSCI Emerging Markets EEM 0.68%
iShares MSCI EAFE EFA 0.33%
iShares Core MSCI Total International Stock IXUS 0.16%
iShares Core MSCI Emerging Markets IEMG 0.18%
iShares Core MSCI EAFE IEFA 0.14%

When I say these products were similar, I'm making an understatement. In each case, the new "core" products track what's actually a better version of the MSCI index in question. The iShares Core MSCI EAFE ETF (IEFA | A-93), for instance, tracks the "investable markets index" version of the Europe/Asia/Far East, which extends its coverage down into small and even micro caps (and which earn it, consequently, a higher fit score than the iShares MSSCI EAFE ETF).

The Performance Advantage

Put another way, it's not only cheaper, it's better. And in fact, if you look at the performance of all six of these ETFs since the launch of the core series, every single one of the core products has been objectively better for investors.


Source: Bloomberg

Over the nearly two-year period, each Core product is outperforming its old counterpart by anywhere from 1-2 percent.

Some of that's exposure having better exposure. Some of it's being cheaper. But the third piece is even more interesting—tracking difference. Let's just stick with EAFA as our example. Here are the tracking difference stats for the old fund, EFA:


And here they are for the Core fund, IEFA:



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