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 With $998 billion in ETF money, BlackRock has more than the next
contenders, Vanguard and State Street Corp <STT.N>, combined. But
the company has struggled to compete with Vanguard, known for its
investor-friendly low-cost investing, for Mom and Pop's nest eggs.
Retail investors now account for more than half of the $1.8 trillion
in ETF assets under management in the U.S, according to consulting
firm PwC.
So far this year, Vanguard has pulled in about $30.3 billion in net
new ETF money in the U.S., or about 43 percent of the market, while
iShares is second with $24.7 billion, or about 35 percent. That
reflects a trend that's been going on for years: at the end of 2009,
BlackRock had 47.7 percent of total U.S. ETF assets under
management, compared with 11.7 percent for Vanguard. By the end of
May, BlackRock's share was down to 38.9 percent, compared with 20.6
percent for Vanguard, according to Lipper Inc, a unit of Thomson
Reuters.
"Our aspiration is to be number one in flows, and we can't get there
without being higher in the retail market place," said Mark Wiedman,
the BlackRock executive who heads the iShares business globally,
speaking at the company's annual meeting in New York in June. "We
are starting to change our voice for that audience and I would say
historically we frankly haven't done that good a job."
The market share loss comes in spite of BlackRock's two-year effort
to win retail investors. BlackRock introduced a line of low-cost
"buy and hold" investor-aimed ETFs in 2012, and since then has been
cutting prices on its ETFs, revamping its sales team, and pushing a
new branding campaign. The firm has cut prices on 12 funds since
2012, ranging from its S&P Total U.S. Stock Market ETF then to its
high-dividend ETF in June 2014.
BlackRock says its flows have improved since it started its new
retail effort.
One of the most significant price reductions was in its iShares High
Dividend ETF. The cost to investors for that fund dropped to 0.12
percent a year from 0.4 percent, a move that would cost BlackRock
$11.2 million annually, based on the $4 billion in the fund. Last
quarter, iShares ETFs generated some $765 million in base fees
revenue.
"Every basis point that you cut a fee impacts revenues, but we don't
really look at that – we look at the profitability of our ETF
business over the long term," BlackRock executive Frank Porcelli,
head of U.S. Wealth Advisory Business, said at Reuters' Global
Wealth Management Summit in June.
Asked about how fee cuts would affect BlackRock's profits, he said
it was "not relevant."
BIGGEST MANAGER
With $4.4 trillion in total assets among its various product lines,
BlackRock remains the world's largest asset manager and is unlikely
to be eclipsed by Vanguard anytime soon.
BlackRock has nearly tripled the size of the iShares business since
it bought it from Barclay's five years ago, largely by selling to
big institutions, such as the Arizona State Retirement System, which
plunked down $300 million to seed three iShares funds last year. It
has also won institutional and retail investors abroad; BlackRock
has a strong presence in Europe, Asia, Canada and Latin America.
Total BlackRock ETF assets outside of the U.S. are about $280.5
billion, about 36 percent of the $700 billion total market.
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Analysts say that iShares' size and scale makes the effect of fee
cuts in the near-term fairly minimal on the overall business, but
that a prolonged price war could hurt the firm.
"It's a tough spot to be in," said Edward Jones analyst Jim
Shanahan. "There is some growth potential there, but it is slow to
materialize and it has to be powerful enough to offset the addition
of a lot of these products with fees less than the current weighted
average fee rate."
Vanguard, which unlike BlackRock isn't publicly traded, offers
significantly cheaper funds. The average expense ratio of a Vanguard
ETF is 0.14 percent, or $14 for every $10,000 invested, compared
with the industry average of 0.58 percent. BlackRock's average
expense ratio is 0.32 percent.
"When talking about large, commoditized ETFs, low cost makes a big
difference, and Vanguard is a little bit more competitive," said
Gabelli & Co analyst Macrae Sykes.
"Investors recognize Vanguard as the low-cost leader – whether for
index funds, for active funds, for bond funds, for money market
funds, or for ETFs," said Vanguard spokesman David Hoffman. "We like
to say that we've been lowering the cost and complexity of investing
for 38 years. We are also increasingly being recognized for our
commitment to providing high-quality products that can play an
enduring role in a portfolio."
MARKETING TO MOM AND POP
The iShares team has been working on building its brand. An "iShares
by BlackRock" advertisement now shares the same spot on the New York
Times home page as a Vanguard ad that bears its trademark ship. The
two alternate in the advertising space next to the markets section.
"Brand is important, and we recognize that," BlackRock executive Raj
Seshadri, head of U.S. Wealth Advisory iShares and former global
chief marketing officer, said in an interview.
To succeed better with retail investors, iShares will have to win
over advisers such as Carl Amos Johnson, a fee-only adviser and
owner of Grove Street Fiduciary in Peterborough, New Hampshire. He
estimates that roughly 90 percent of the ETFs in his clients'
portfolios are Vanguard funds.
"They (Vanguard) have captured the low-cost retail index mind, and
even the most naive investor knows that," Johnson said. "To me the
brand is not the key, but in the mind of a client, it is a big
difference."
(Reporting by Ashley Lau in New York; editing by Linda Stern and
John Pickering)
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