Bloomberg reports that BlackRock Inc. and State Street Corp., the world’s top sellers of exchange-traded funds, may be forced to cut fees as they lose assets to lower-priced competitor Vanguard Group Inc.
According to the news service, Vanguard’s U.S.-based ETFs pulled in $25.6 billion this year through Sept. 30, 26% more than BlackRock and State Street combined, according to Chicago-based Morningstar Inc. Vanguard last month offered nine new equity ETFs, taking on the bigger companies for the first time with funds that track Standard & Poor’s and Russell indexes, including the S&P 500 Index.
Assets in ETFs rose almost 14-fold in the past decade to $897 billion, Morningstar data show. Bloomberg notes State Street and BlackRock dropped to a 70% combined share from 85% in 2005, as investors flocked to lower-fee funds from Vanguard, Charles Schwab, and Pacific Investment Management Co.
“Cost isn’t everything, but it does matter,” David Nadig, director of research for Index Publications LLC in Decatur, Ga., said in an interview with Bloomberg. “For the more competitive segment of the market, investors are voting with their feet.”
“That’s a hard pill to swallow to cut fees, because you are literally throwing money away” in the short run, Nadig added.
Vanguard was initially reluctant to offer ETFs. Founder John Bogle repeatedly criticized the product for encouraging short-term investing, and is now at odds with his former company. Bloomberg notes it was just one year after his retirement in 2000 that Vanguard introduced Total Stock Market ETF.