Preparing For Next ETF Fee War Battle

A new deal between Morningstar and iShares could shake up the growth space.

Reviewed by: Todd Rosenbluth
Edited by: Todd Rosenbluth

•     Year-to-date through Dec. 15, the SPDR Portfolio S&P Growth ETF (SPYG) and the Vanguard Growth ETF (VUG) were more popular than growth ETFs offered by iShares.

•    Aided by Morningstar, iShares will likely soon bring the fees for the iShares Morningstar Large-Cap Growth ETF (JKE) and the iShares Morningstar Large-Cap Value ETF (JKF) below that of the cost of any funds offered by one of the top five U.S. ETF providers.

•    Morningstar index-based ETFs represent less than 2% of the U.S.-listed equity universe, but the iShares Core Dividend Growth ETF (DGRO) and the JPMorgan Beta Builders Japan ETF (BBJP) are examples of low-cost offerings tracking Morningstar indexes that have gained traction in 2020.


Morningstar & iShares Join Forces

Morningstar joining forces with iShares sets the stage for next battle in the ETF fee war. In mid-December, Morningstar announced it will formally launch a new index family, designed to “more accurately represent the size and style dimensions of the U.S. equity market.”

Nine ETFs offered by iShares will begin tracking the new Morningstar Broad Style Indexes likely by the end of the first quarter of 2021, including JKE and JKF, as well as small- and midcap dedicated offerings. JKE and JKF ETFs currently hold 39 and 73 securities, respectively, and will ultimately own more companies, including some midcaps. They will also have new tickers (ICLG and ICLV) that reflect an increased priority from iShares, the industry’s largest ETF provider.

“Our continued relationship with Morningstar reinforces our value proposition and our willingness to use the scale of our platform to provide better solutions and outcomes for our clients,” said Armando Senra, managing director and head of iShares Americas at BlackRock.

iShares did not announce any expense ratio cuts related to these Morningstar-based ETFs, but we think a price slashing is inevitable, as JKE and JKF charge premium fees of 0.25%. We expect the fees to be lowered to 0.03% by the middle of 2021.

An Overview Of The Space

There are a lot of low-cost style ETFs to consider. For example, CFRA classifies 34 ETFs as U.S. large cap growth, including a quartet—one each from iShares, Schwab, State Street Global Advisors and Vanguard—that charge just 4 basis points and collectively manage $100 billion in assets.

A fifth one, the Sofi Select 500 ETF (SFY), charges no fee at all but has less than $140 million in assets. While there are holdings differences among these ultra-cheap funds as well as others sporting a premium fee, we think investors focus heavily on an index ETF’s expense ratio with style-box investments.

In 2020, investors have further sorted through the four ETFs charging 0.04% expense ratios and picked their favorites. As Chart 1 shows, VUG and SPYG pulled in $3.6 billion and $1.9 billion of net inflows, respectively year-to-date through Dec. 15, in contrast to just $28 million for the iShares Core S&P U.S. Growth ETF (IUSG) and approximately $600 million for the Schwab U.S. Large Cap Growth ETF (SCHG).

Meanwhile, JKE gathered $132 million of net inflows, which was much better than the $3.1 billion and $695 million of net outflows the iShares Russell 1000 Growth ETF (IWF) and iShares S&P 500 Growth ETF (IVW) incurred. As iShares lost some ground to Vanguard and State Street Global Advisors for large cap growth investing, despite gathering an impressive $117 billion of year-to-date net inflows across its lineup, we think it makes sense for this growing division of BlackRock to use its scale to reset the price floor.


Source: CFRA’s First Bridge ETF Data as of Dec. 15, 2020


Morningstar’s Role

Morningstar has a small presence in the index-based ETF world but has room for growth. ETFs tracking Morningstar-based indexes represented just 1.5% of U.S.-listed fund assets at the end of October 2020, a distant sixth behind S&P Dow Jones Indices (40% market share), MSCI (17%) and FTSE Russell (16%), with CRSP and Nasdaq also having a larger presence.

However, iShares ETFs represented approximately half of the assets tied to Morningstar indexes, led by the $14 billion DGRO, which charges just 0.08% and added $2.9 billion of new money in 2020.

Meanwhile, J.P. Morgan offers a popular, low-cost suite of market-cap-weighted index-based ETFs tied to international markets and core U.S. large- and midcaps tracking Morningstar benchmarks. The $6.2 billion BBJP and the $1.3 billion JPMorgan BetaBuilders U.S. Mid Cap Equity ETF (BBMC) are examples that were popular in 2020, each pulling in $1.1 billion thus far in 2020.


Source: CFRA’s First Bridge ETF data as of Oct. 31, 2020


When Morningstar announced the appointment of Ron Bundy as the head of Morningstar’s index business in January 2020, joining from FTSE Russell, Bundy said, “There is no company in a better position to lead the way in an indexing industry that is ripe for investor empowerment, disruption and growth.” CFRA expects the ETFs tied to Morningstar’s new style indexes to be aggressively priced, below the competition, to drive faster adoption.


We expect Morningstar-based iShares style ETFs to be the cheapest available from a top-five ETF provider by the end of the first half of 2021 and to gain strong net inflows. While investors should look beyond a fund’s expense ratio in sorting through the ETF universe, we believe cost remains a key factor when building asset allocation portfolios.

However, given the ongoing multiyear ETF fee war, we would expect Schwab, State Street Global Advisors and/or Vanguard to match the fees of the iShares suite before too long, if not preempt the move.


All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information and disclosures, please refer to CFRA's Legal Notice at

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Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence’s equity and fund business in October 2016. Follow him at @ToddCFRA.