BlackRock Inc. is losing its tight grip on the $927 billion U.S. ETF market — potentially costing the company hundreds of millions of dollars in revenue — and the competition is just starting to heat up.
Major competitor The Vanguard Group Inc. has been gaining market share at BlackRock's expense, undercutting BlackRock's iShares products on fees, and rolling out new ETFs that go head-to-head with the market titan.
BlackRock, with $494 billion in global ETF assets, held 46% of the worldwide exchange-traded fund market, according to a report by Goldman Sachs Group Inc. Its nearest competitor, State Street Global Advisors, with $140 billion in global ETF assets, accounted for 13%, and Vanguard, with $113 billion worldwide, accounted for 11%.
But BlackRock's dominance is under threat, at least in the United States, its primary market.
Its U.S. market share was 46.9% as of Aug. 31, according to Goldman, that was down from 59.3% four years ago. By contrast, Vanguard's U.S. market share as of Aug. 31 was 14.9%, up from just 5.3% in 2006.
U.S. ETF revenue for 2010 is estimated to be $1.35 billion for BlackRock, $336 million for SSgA and $177 million for Vanguard, according to an analysis by Pensions & Investments.
U.S. ETFs contribute an estimated 18% to BlackRock's money management revenue and 30% to SSgA's, according to the P&I analysis. P&I was not able to determine how much ETFs contribute to Vanguard's revenue.
According to P&I's analysis, a potential fee war could cost BlackRock around $400 million in lost revenue annually.
The challenge BlackRock faces is exemplified by the small net inflows to its $48 billion iShares MSCI Emerging Markets compared with a similar Vanguard fund.
The emerging markets ETF — BlackRock's biggest revenue-producing ETF — garnered $4.3 billion in net inflows this year through October. But Vanguard's MSCI Emerging Markets fund had $16 billion in net inflows during the same period, reaching $40.5 billion in assets. The BlackRock ETF is priced at 72 basis points; Vanguard's, 22 basis points.
Paul Justice, Chicago-based Morningstar Inc.'s chief ETF strategist, said the Vanguard emerging markets fund is on track to topple BlackRock's within a matter of months. The reasons, he said, are lower costs and an increase in liquidity as Vanguard's ETF gets closer in size to BlackRock's.
That change would be no small matter for BlackRock's iShares unit, which would lose an estimated $115 million in revenue if it reduced its fees 25 basis points on its emerging markets fund to narrow the fee difference to stay competitive, according to P&I's analysis. The change would mean more than a 1.5% hit to BlackRock's total revenue, according to P&I estimates.