BlackRock Announces More Fee Cuts As ETF Price War In Europe Continues

Earlier this week, BlackRock (NYSE:BLK) announced plans to slash the expense ratios for two of its popular U.K. exchange-traded funds (ETFs). ^[1] This move follows a much larger round of price cuts announced last June, when the world’s largest asset management giant slashed the expense ratios for six of its existing European ETFs and also introduced eight new low-cost ETFs. ^[2]

Over the last few quarters, the world’s largest asset managers have been locked in a price war over their ETF offerings in Europe, as all of them target retail investors in a bid to increase their market shares in the rapidly growing industry. The ETF market in Europe is primarily dominated by BlackRock, Vanguard, State Street (NYSE:STT), Deutsche Asset & Wealth Management (DAWM) – the asset management arm of Deutsche Bank (NYSE:DB) – and Lyxor – a part of Société Générale. BlackRock’s latest decision is aimed at consolidating its leadership position in the region, even as Vanguard’s long lineup of extremely low-cost ETFs pose a growing threat.

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The best indicator of the popularity of ETFs and other exchange traded products (ETPs) is the fact that the industry has grown to larger than $2.7 trillion in size (as of December 2014) from being a largely obscure investment option at the turn of the century. ^[3] The reason for this growth is that ETFs provide investors a cheap and convenient way to put their money into fixed income, equity, currency, commodities and other investment markets. And with the popularity really only skyrocketing in the past few years, the industry has the potential to continue to grow considerably in the future.

The largest avenue of growth for ETF providers over the coming years is expected to be the retail investor market, which remains extremely under-served. As retail investors are much more sensitive to expense ratios, asset managers have been trying to attract them with a string of low-cost ETFs. This in turn has triggered a price war among incumbents in the ETF industry – largely thanks to the popularity of low-cost, core ETFs from Vanguard. Over recent years, Vanguard has seen the best growth globally among retail investors thanks to the proven track record of its low-cost ETF lineup.

DAWM started the trend of cutting expense ratios for European ETFs last February with a target of nearly doubling its share of the German ETF market by the end of 2015. ^[4] The competition intensified considerably in June, when BlackRock upped the ante by slashing the expense ratios for six existing European ETFs by almost 60% and also introducing eight new low-cost ETFs. ^[2] Within months, Vanguard announced a series of price cuts of its own. ((Vanguard stokes ETF price war in Europe, Financial Times, Aug 28 2014)) After holding out until late September, State Street also joined the fray with a cut in fees for 15 of its ETFs, followed by another round of cuts in December. ^[5]

The recently announced round of expense ratio cuts by BlackRock affects the iShares FTSE 100 UCITS ETF (Dist) fund – the oldest ETF on the London Stock Exchange. The offering was listed in 2000 and is the largest equities ETF in the U.K. with around £3.8 billion ($5.7 billion) in assets under management as of now. ^[1] Its expense ratio has been slashed more than 80% from 40 basis points to 7 basis points (0.4% to 0.07%) – making it cheaper than similar offerings by Vanguard and DAWM, which have expense ratios of 9 basis points (0.09%). The other fund that had its price reduced was the iShares Core FTSE 100 UCITS ETF, which also carries an expense ratio of 7 basis points (0.07%) now – down from 0.1% earlier. Clearly, BlackRock is leveraging its position as the world’s largest asset manager to spread expenses better across its global operations in an attempt to undercut its rivals in the rapidly growing industry.

While the price cuts are good for the overall growth of BlackRock’s asset base (shown in the chart above), it will put pressure on the fee income earned by the asset manager in the future. We believe that the ongoing price wars among asset managers globally will continue to drag down fee income represented as a percentage of total assets (shown in the chart below) in the coming years. You can see how this impacts BlackRock’s share price by making changes to the chart below.

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1. British ETF price war heats up with BlackRock FTSE 100 fee cut, Reuters, Mar 10 2015 [↩] [↩]
2. BlackRock Cuts Europe ETF Fees in Race With Vanguard for Assets, Bloomberg, Jun 1 2014 [↩] [↩]
3. Global ETF Snapshot, State Street Report [↩]
4. Deutsche Bank cuts Europe ETF prices to win institutional business, Reuters, Feb 10 2014 [↩]
5. State Street cuts fees on two European ETFs, City Wire Wealth Manager, Dec 16 2014 [↩]