The biggest winner in The Vanguard Group's move to reduce costs by switching to two lower-priced index providers for 22 of its exchange-traded funds could be its competitor, BlackRock Inc.
While Vanguard officials say they plan to pass along cost savings to customers over time, a more immediate effect could be that BlackRock, New York, would pick up more business from institutional investors that want to stay with ETFs tied to better-known MSCI indexes, analysts and consultants say.
Vanguard officials announced Oct. 2 that in January they will begin to use indexes from two providers, the University of Chicago Booth School of Business' Center for Research in Security Prices and the FTSE Group, London, dropping those provided by New York-based MSCI.
The change means that BlackRock — the biggest ETF provider through its iShares unit — will no longer have to compete with third-ranked Valley Forge, Pa.-based Vanguard on key ETFs that use the same indexes, such as both firms' emerging markets ETFs.
The iShares MSCI Emerging Markets Index Fund, BlackRock's biggest ETF, has been losing market share to the Vanguard MSCI Emerging Markets ETF because Vanguard charges significantly lower fees. The Vanguard ETF surpassed the iShares ETF in assets in January 2011, becoming the third largest ETF in the U.S.
The Vanguard ETF, with an expense ratio of 0.2%, had $67.1 billion in assets as of Sept. 30; BlackRock's iShares emerging markets fund, with an expense ratio of 0.67%, had $36.8 billion.
BlackRock CEO Laurence D. Fink said last month that price cuts were coming for the company's large, liquid core-type ETFs that have lower-priced competition. But analysts say the price cuts might not happen now that Vanguard is changing indexes and will no longer compete with BlackRock on key ETFs that use the same MSCI indexes.
Institutional investors tied to the MSCI indexes, the dominant indexes used to track international equities, probably will switch back to iShares regardless of the higher fees, said Doug Sipkin, an analyst with Susquehanna Financial Group LLC, New York. “The MSCI indexes are the gold standard for institutional investors,” he said.
Given, that, he said BlackRock may reassess it's planned price cuts. “Why would BlackRock lower the fees? It makes it no sense,” said Mr. Sipkin.
ETF consultant James Pacetti, who works for S-Network, an index consulting firm and provider in New York, agreed. Vanguard will lose some institutional ETF and retail investors to BlackRock because those investors will want to stay with the more popular MSCI indexes.
“I think the cork bottles were popping in Larry Fink's office when BlackRock executives heard the Vanguard news,” Mr. Pacetti said.
BlackRock spokeswoman Christine Hudacko said the company would have no comment on whether it planned to go ahead with the ETF fee cuts.
But BlackRock has moved quickly since the Vanguard announcement, said Christopher Shutler, an analyst with William Blair & Co. LLC, Chicago. “BlackRock has already started marketing the differences between the MSCI and FTSE indexes to its institutional investors, so they're clearly looking at this as a market-share opportunity,” he said.
It is unclear just how much of Vanguard's $271 billion in ETF assets comes from institutional investors. A Pensions & Investments analysis of data from Deutsche Bank and FactSet shows that approximately 40% of the assets in the Vanguard MSCI Emerging Markets ETF comes from institutional investors.