September 10, 2012 / 3:27 PM / 6 years ago

BlackRock to lower fees on some ETFS to better compete

NEW YORK (Reuters) - BlackRock Inc (BLK.N) will announce lower fees on some of its core iShares exchange-traded funds in the fourth quarter to better compete with lower-cost products, Chief Executive Officer Laurence Fink said on Monday.

The changes will only apply to some ETFs with lower-fee competition and will not be a “wholesale fee change on everything,” Fink told attendees at the Barclays’ Global Financial Services Conference in New York.

Exchange-traded funds are baskets of securities, like mutual funds, but they trade on exchanges, like individual securities. They are cheaper than mutual funds and allow investors to trade throughout the day, with simultaneous pricing, unlike mutual funds, which price at the end of the day.

Over the past few years, BlackRock’s iShares ETFs have been losing U.S. retail market share as Vanguard Group has aggressively rolled out cheaper ETFs <ID: nL2E8I9368>.

There are 15 investment strategies in which iShares has one or two ETFs that compete directly with Vanguard ETFs but cost more, according to a recent report by Bernstein Research. In all of those categories, Vanguard is taking business away from BlackRock.

This is most notable with one of BlackRock’s biggest ETFs, the $35 billion iShares MSCI Emerging Markets Index Fund (EEM.P), from which investors withdrew w$1.14 billion in the three years ending July 31, according to Bernstein.

Vanguard’s comparable ETF, the $54.8 billion Vanguard MSCI Emerging Markets ETF (VWO.P), gained $39.7 billion over the same period. The Vanguard ETF costs 0.47 percent less than the iShares ETF.

“If I were to guess where they are looking to cut fees, I would guess that is one,” said Luke Montgomery, an analyst at Bernstein Research.

Despite its plans to reduce its fees on some ETFs, BlackRock still anticipates its margins to grow to more than 40 percent in the near future, Fink said.

“Those products are going to have reduced fees and reduced margins... but we still have increasing margins in some of our other ETF products,” he said. “The key is about building out more innovative products.”

If BlackRock can reduce fees around those ETFs that compete with Vanguard’s to within 10 basis points, that could help in winning new money when investors are choosing between the two firms’ ETFs, said Paul Justice, director of ETF research at Morningstar (MORN.O).

“As long as you are that close, people don’t feel like it’s really going to impact their long-term returns,” he said.

BlackRock shares were down 0.1 percent at $180.41 in late morning trading.

Reporting by Jessica Toonkel; Editing by Gerald E. McCormick, Lisa Von Ahn and Dan Grebler

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