by Aaron Levitt | February 11, 2014 6:00 am
With more than 150 different funds to choose from, asset manager BlackRock’s (BLK) $625 billion iShares line is one of the reigning kings in the land of exchange-traded funds (ETFs). It’s been a pretty big innovator in launching new products designed to help investors tailor their portfolios and outperform the broad markets.
It’s also a pretty big bruiser and bully when it comes to its competitors.
There’s been a lot published about the so-called ETF Fee War. But iShares most recent salvo is the latest eruption and perhaps the ultimate end-game for investors: no-fee ETFs.
With the launch of its new, floating-rate treasury ETF — the iShares Treasury Floating Rate (TFLO) — BlackRock has set the bar pretty low when it comes to annual expense ratios — down to 0%. This, along with several other cost cutting fund launches, is exacerbating the trend towards lower and lower operating expenses for ETFs.
In the end, investors’ portfolios win. However, several smaller ETF and mutual fund operators may not.
On its surface, there’s nothing particularly exciting about iShares new TFLO launch. The Treasury Department unveiled a new bond type that will reset coupon payments as interest rates rise above LIBOR rates. Barclay’s designed a new index to track these floating rate treasury notes and BlackRock filed for a new ETF designed to track the brand new bond index.
Nevertheless, the devil is in the details.
Given that the new “floaters” have rising interest rate protection built in, investor interest is quite high. The initial Treasury auction was one of the fastest selling since 2012. At the same time BlackRock filed for their new ETF, so did several other sponsors. Many of these will launch later this year. However, the WisdomTree (WETF) Bloomberg Floating Rate Treasury Fund (USFR) was scheduled to go public the week before iShares TFLO.
Sensing that it might lose out on an early asset grab, iShares moved up the date of its TFLO launch to be the same day as WisdomTree’s USFR. And here’s where it’s really interesting for investors. Both TFLO and USFR were scheduled to charge a dirt cheap 0.15% in operating expenses. However, in a late-night move, iShares cut the expense ratio for the new fund down to 0%.
Zero, zilch, nada.
That’s right — according to the ETF’s prospectus, TFLO will cost you nothing to own for at least one year due to the expense ratio waivers. At the same time, BlackRock also cut the expense ratio its $2.4 billion iShares Short Treasury Bond ETF (SHV) down to zero as well.
In addition, iShares launched three currency-hedge international ETFs, which is pretty much giving WisdomTree the finger. Currency-hedge international ETFs have long been the stomping ground of WisdomTree and its $11 billion WisdomTree Japan Hedged Equity (DXJ).
While the new iShares Currency Hedged MSCI Japan (HEWJ) does charge the same in expenses — 0.48% — those expenses should drop as the ETF gains assets. Unlike the DXJ — which holds various individual Japanese stocks and currency swaps, HEWJ only holds shares in the popular iShares MSCI Japan (EWJ) and futures contracts.
That makes the HEWJ much cheaper to operate on a long term basis. Not to mention brand recognition in the institutional investor favorite MSCI tracking index.
This isn’t the first time BlackRock has gone after smaller ETF rivals with cheaper “me-too” products. It took on Van Eck in the emerging market and hard asset/commodities sectors and more recently PowerShares in the factor and low volatility space.
The biggest takeaway from iShares “bullying” of smaller rivals is that fees for ETFs will continue to drop.
I suspect that Vanguard and State Street (STT) — the other two major ETF providers — are studying the recent BlackRock decision to lower some expense ratios to zero. There’s no reason why huge funds like the $343 billion Vanguard Total Stock Market ETF (VTI) can’t be run for only 0.01% in expenses. VTI currently charges 0.05%. Likewise for State Street’s popular SPDR suite of sector funds.
In the end, the competition for lower expense ratios might hinder some of the smaller players unless they truly have a special niche product. However, for those investors looking to track some broad index funds, the continued downwards push in operating fees is ultimately a win-win. High expense ratios over the long term zap returns.
Paying almost nothing — or in TFLO’s case absolutely nothing — improves performance. And that’s a good thing for investors.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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