Hougan: More To iShares Core Than Fee Cuts

July 10, 2014

The iShares Core launch was pure genius, but it's too early to say if it was a success.

I agree with my colleague Dave Nadig’s recent blog, iShares Winning Fee War With Itself: The iShares Core launch was a stroke of genius. In fact, I wrote the exact same analysis 15 months ago when the iShares Core products launched. Imitation is the highest form of flattery, I guess, huh Dave?

What’s missing in Dave’s analysis is an answer to this fundamental question: Was the launch of the Core lineup a commercial success?

Let’s look at the numbers.

Viewed simply, the Core lineup brought in solid flows. If you take the seven core equity markets included in the original iShares Core lineup and compare iShares’ flows against its competitors (Vanguard and Schwab) before and after the Core launch, it looks like the smartest business move in the world.

ETF Fund Flows Comparison: Pre and Post Core
Asset Class iShares Pre Core Vanguard Pre Core Schwab Pre Core iShares Post Core Vanguard Post Core Schwab Post Core
International Ex-US 493 1,833 607 935 3,677 1,269
Developed Markets 2,137 5,080 578 10,683 10,406 1,298
Emerging Markets (1,160) 31,686 499 6,201 (11,543) 528
US Total Market (5) 4,176 759 693 10,463 1,560
S&P 500 4,418 4,978 546 9,382 10,078 1,392
U.S. Mid-Cap 1,804 504 222 7,431 2,308 693
U.S. Small-Cap 406 (340) 424 1,674 2,263 902
TOTAL 8,093 47,917 3,028 36,999 27,652 6,373
Compares flows for 7/4/2010 to 10/22/2012 with 10/23/2012 to  7/4/2014

iShares’ share of total net flows into these seven categories rose from 14 percent before the Core launch to 51 percent after the Core launch.

Look closer, however, and the nuances pile up.

The vast majority of that shift is accounted for by flows into one category: emerging markets. For the 15.5 months leading up to the Core launch, iShares lost $1.2 billion in outflows from its MSCI Emerging Markets ETF (EEM | B-99), while Vanguard pulled in an amazing $32 billion in emerging markets assets. Since the launch, that trend has reversed: iShares has pulled in $6.2 billion, while Vanguard has hemorrhaged $11.5 billion.

The other category where iShares has done appreciably better is Developed Markets. Prior to the Core launch, it had just $2.1 billion in flows into the iShares MSCI Developed Markets ETF (EFA | A-91), while Vanguard pulled $5.1 billion into its Vanguard FTSE Developed Markets ETF (VEA | A-91). Since the launch, iShares has topped Vanguard, gathering $10.7 billion in assets against $10.5 billion for Vanguard.

The vast majority of those inflows, however—$8.5 billion of the $10.7 billion—have gone into the old, non-Core iShares MSCI EAFE ETF (EFA), with just $2.2 flowing into the newer, cheaper iShares Core MSCI EAFE ETF (IEFA | A-93)).

Everywhere else is a tossup. For domestically focused ETFs, the iShares’ share of flows is about the same as it was before the Core launch: 37 percent versus 39 percent.


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