BlackRock Inc, the largest manager of ETFs through its iShares brand, said it is cutting fees on seven of its over 700 exchange-traded funds.
One such fund – iShares Core S&P Total U.S. Stock Market ETF – is being cut from 0.07 percent of assets to 0.03 percent. That sent the sticker price of that $2.8 billion fund below that of larger funds, such as the Vanguard Total Stock Market ETF, at 0.05 percent, and the Schwab U.S. Large-Cap ETF, at 0.04.
Charles Schwab Corp struck back later Tuesday, saying it would lower the expense ratio on that fund to 0.03 percent, according to spokesman Greg Gable. The timing of that price cut was not immediately clear. Gable said the firm would also “look at” a rate cut on its 0.04 percent U.S. Broad Market ETF.
While those fees may seem small, they equate to millions in revenue for asset managers and in potentially increased performance for investors.
Three U.S. brands – BlackRock, Vanguard and State Street Corp – control 88 percent of the ETF market’s assets. They continue to trim prices, as has Schwab. Both Schwab and Vanguard have expanded their shares of the ETF market dramatically over the past several years.
Overall, the expenses attached to ETFs have dropped for each of the last three years, to 0.51 percent for the average stock ETF in 2014, according to Lipper.
“At the end of the day, this kind of fee competition benefits investors,” said Michael Rawson, an analyst at Morningstar Inc. “It’s good to see.”
BlackRock’s reduction could cut an estimated $1 million of management fees BlackRock collects on the product each year, a 57 percent reduction. But cost reductions can drive a wave of new assets into those funds, raising the fees they collect.
“Our goal is to be present in the core of investors’ portfolios,” said Ruth Weiss, head of the U.S. iShares product team, in an interview. “We know that price is an important factor in the decision.”
New York-based BlackRock is also replacing the Core S&P Total U.S. Stock Market ETF’s underlying index with one that includes more small companies. Expenses on six other so-called core iShares ETFs will be cut. The funds are aimed at buy-and-hold retail investors.
The Schwab price cut was first reported by the Wall Street Journal.
Vanguard spokesman David Hoffman said that company’s ETF lineup has average expense ratios of 0.13 percent. Vanguard delivers its ETF products at cost, so the expense ratios cover costs of running the funds but do not include profits, the spokesman said.
“Being an all-the-time, across-the-board cost leader is in our DNA,” he said in an email. “Other investment firms may lower costs on a small sub-set of funds or have a separate brand of low-cost products as a business strategy to attract assets.”