BlackRock Inc.'s strategy to offer 10 low-cost exchange-traded funds for buy-and-hold investors will cost it revenue at the outset, but analysts say the effort to reclaim business and market share it has lost in recent years is generally positive long term.
Management has said the estimated cost to BlackRock's revenue will be about $35 million to $40 million annually. That figure, however, only accounts for the revenue on the six funds whose expense ratios were reduced. Analysts' estimates vary — from an amount in line with management's estimate to nearly $90 million in annual forgone revenue, when all 10 are included.
A fee-reduction analysis by Keefe, Bruyette & Woods, New York, found that - based on Sept. 30 assets under management figures — BlackRock will forgo $37.9 million annually on the six ETFs on which the firm cut fees. KBW's analysis also found that BlackRock stands to forgo almost $52 million in annual revenue related to the four new funds that began trading on Oct. 22, assuming 20% of assets flow from BlackRock's pre-existing ETFs into the new, cheaper alternatives.
Taken together, the $89.5 million in potential forgone revenue would represent 4.1% of the total revenue the iShares business generated in 2011, and 1% of BlackRock's combined operating revenue for 2011.
Despite that potential hit, Greggory Warren, senior stock analyst who covers BlackRock at Morningstar Inc., Chicago, said the cost of BlackRock's move to lower-fee ETF options is likely to be offset by the company's launch of its own internal trading platform.
The announcement on Oct. 15 unveiled a new strategy to drive global and U.S. growth for its iShares exchange-traded-funds unit. The company launched a suite of 10 ETFs, which it's calling “core” offerings, that will be priced in line with lower-cost providers. The Core Series includes four new funds that are lower-cost versions of international equity and short-term U.S. bond funds on which the company did not reduce expenses. The firm is also initiating a global branding campaign and combining the sales forces of its iShares and U.S. BlackRock retail units.