iShares: The Low Cost ETF Issuer?

by on February 8, 2012 | ETFs Mentioned:

With more than 40% of the U.S. market, iShares has long been the leader in the U.S. ETF industry. But in recent years the competition has been gaining ground, thanks in part to more cost efficient products. According to the ETF Industry Association, Vanguard led all ETF issuers with almost $36 billion in cash inflows last year, handily exceeding the $28.8 billion iShares took in. Much of the difference in inflows between the two was related to a small group of ETFs linked to identical indexes but distinguished by cost differentials; the cheaper Vanguard funds drew significantly more interest than competing iShares ETFs. The biggest differential related to the emerging markets ETFs offered [see also The Ten Commandments of Commodity Investing]:

Ticker ETF Index Expense Ratio 2011 Flows
VWO Vanguard MSCI Emerging Markets ETF MSCI Emerging Markets Index 0.22% $7,808
EEM iShares MSCI Emerging Markets Index Fund MSCI Emerging Markets Index 0.69% ($6,773)

The difference was not quite as significant in the bond ETF space, but still pointed towards a move to low cost Vanguard funds:

Ticker ETF Index Expense Ratio 2011 Flows
BND Vanguard Total Bond Market ETF BarCap U.S. Aggregate Bond Index 0.11% $5,157
AGG iShares Barclays Aggregate Bond Fund BarCap U.S. Aggregate Bond Index 0.22% $2,437

After losing ground to more cost efficient ETFs in 2011, iShares has come out in 2012 with a focus on taking market share from existing funds–using lower costs as one of the primary attractions. It appears that iShares is moving to aggressively compete on costs in popular corners of the market, introducing new, cost-efficient ETFs that will compete head-to-head with established multi-billion dollar funds. So far in 2012 iShares has been extremely active on the product development front, already rolling out 18 new funds in the first five weeks of the year. Several of the latest additions to the iShares lineup have been first-to-market products, but many will be going head-to-head with existing ETFs on the market and seem to be competing on the basis of cost efficiency [see also Fund Managers Turn Bullish As “Risk Appetite” Increases]:

  • MSCI Australia Small Cap Index Fund (EWAS, 0.59%): This ETF will go head-to-head with the IndexIQ Australia Small Cap ETF (KROO), which has about $16 million in AUM and charges 0.69%.
  • MSCI Canada Small Cap Index Fund (EWCS, 0.59%): This ETF targets a similar group of securities as the IQ Canada Small Cap ETF (CNDA), which has about $35 million in AUM and an expense ratio of 0.69%.
  • MSCI Global Agriculture Producers Fund (VEGI, 0.39%): This ETF taps into the global agribusiness sector, an asset class already covered by the Market Vectors Agribusiness ETF (MOO), among others. MOO has an impressive $6 billion in assets, and iShares no doubt hopes to capture some of the dollars targeting this segment. VEGI will charge just 0.39% in annual expenses, which puts it well below the 0.56% charged by MOO. PAGG and CROP, two other ETFs targeting this space, both charge 0.75%.
  • MSCI Global Silver Miners Fund (SLVP, 0.39%): This fund is the second to target silver mining stocks, joining the Global X Silver Miners ETF (SIL). That fund, which debuted in 2010, has about $370 million in AUM. The new iShares ETF will offer a much lower price tag; SLVP charges just 0.39%, compared to 0.65% for SIL. It should be noted, however, that SIL focuses more exclusively on “pure play” silver miners, whereas SLVP includes a number of stocks that derive earnings from other precious and industrial metals.
  • MSCI Global Gold Miners Index Fund (RING, 0.39%): This new ETF represents perhaps the most exciting opportunity for iShares, since it will compete directly with the Market Vectors Gold Miners ETF (GDX has about $7.7 billion in AUM). Though the two ETFs have significant overlap–eight of the top ten holdings of GDX are also in the top ten of RING–the new iShares ETF has a big edge in expenses. RING charges an expense ratio of just 0.39%, compared to 0.53% for GDX.
  • MSCI India Index Fund (INDA, 0.65%): This ETF targeting the popular emerging market charges just 0.65%, which puts it well below competing ETPs such as EPI (0.83%), PIN (0.78%), and INP (0.89%).

It should be noted that some of the new iShares ETFs are actually more expensive than similar products already on the market; NORW is slightly cheaper than ENOR, while GERJ has a slight edge over EWGS. But for the most part, iShares seems to be acknowledging the importance of cost efficiency to investors, and moving to take on several large, well established ETFs with cheaper alternatives [see also Alternatives To The 20 Most Popular ETFs].

That should be a significant positive for investors; lower fees result in investors keeping a larger percentage of bottom line returns.

Disclosure: No positions at time of writing.