iShares is rethinking index contracts

BlackRock unit eyes change to counter Vanguard's switch to flat fees

Mark Wiedman
Mark Wiedman

BlackRock (BLK) Inc. (BLK)'s iShares is reviewing its contracts with index providers in light of The Vanguard Group Inc.'s switch to flat fees for licensing indexes instead of paying a portion of exchange-traded-fund assets.

Nothing is “imminent, but it's something we're looking at and will continue to look at,” Mark Wiedman, global head of iShares, said Monday during a panel discussion at the IndexUniverse Inside ETFs conference in Hollywood, Fla.

The licensing fee that an ETF pays an index provider historically has been a percentage of assets that the fund gathers.

Such agreements rob ETFs of the benefit of economies of scale because the licensing fee doesn't go down as fund assets go up, even though the index provider's job doesn't get any harder, Joel Dickson, a senior investment strategist at Vanguard, said during the discussion.

Vanguard dropped MSCI Inc. as the index provider for 22 of its ETFs last fall to move to a fee-based licensing agreement with FTSE Group and The Center for Research in Securities Prices.

“We wanted to be able to return economies of scale to the investors,” Mr. Dickson said.

The original agreements greatly benefited index providers because in the early days of ETFs, having a well-known index brand gave an ETF credibility. That isn't necessarily the case anymore.

“The value is changing,” Mr. Wiedman said, adding that 10 years ago, ETF brands were weak, and index brands were valuable. ETF brands have become stronger, though, giving the ETF providers more leverage.

In this case, iShares may have even more leverage to lower costs. After MSCI failed to come to a new agreement with Vanguard, its share price fell more than 20% to $28 a share, and it has yet to regain those losses.

Jason Kephart writes for InvestmentNews, a sister publication of Pensions & Investments.