Is iShares Slipping In The ETF Industry?

by on August 3, 2009 | ETFs Mentioned:

As ETFs have grown in popularity over the last several years, iShares has firmly established itself as the market leader, its name becoming practically synonymous with that of the products it offers. With more than 180 funds, many of which are among the largest on the market, iShares ETF platform offers exposure to multiple asset classes covering nearly every corner of the investable market. The recent acquisition of the fund family by BlackRock has given the firm even more marketing firepower, and we’ve seen a number of new fund launches since the deal was announced. But iShares might not want to rest on its laurels for too long reports the Wall Street Journal’s Shefali Anand.

iShares Is Sill The Market Leader, But Vanguard May Be GainingAnand notes that iShares has historically been able to charge much higher fees than its competitors because its products typically feature very narrow bid-ask spreads. iShares MSCI Emerging Markets ETF (EEM), for example, charges expenses of 0.72%, 45 basis points more than Vanguard’s Emerging Markets ETF (VWO). While this isn’t a huge deal to long-term investors, it matters to high-frequency traders who make their living off of a few basis points here and there.

But iShares advantage in this space may be disappearing. Bid-ask spreads on Vanguard funds have declined significantly, and are now roughly in line with iShares products. If Vanguard’s products become competitive with iShares offerings in terms of liquidity, investors may begin to look more carefully at expense ratios, a metric that in almost all cases will favor Vanguard funds.

And then there’s the slew of new entrants to the ETF industry. Guggenheim recently made a splash in the industry, snapping up Claymore’s line of ETFs (along with other Claymore entities). And Pimco’s initial ETF launch (which has an expense ratio of a measly 9 basis points) was well received, no doubt setting the stage for more funds from the bond giant. Large players bring with them the ability to significantly expand the reach of new or existing product offerings, a strategy that frequently involves lower fees. The presence of more major players in the ETF industry could lead to more competitive pricing throughout the industry down the road, forcing iShares to either slash its fees or risk losing share to low-cost issuers.

Disclosure: No positions at time of writing.