Dirt-Cheap Fees: Boon or Bane for ETF Issuers?

Wall Street hit highs in the second quarter but renowned ETF issuers like BlackRock Inc. BLK and State Street Corp. STT failed to cash in on the towering stock market. Both investment behemoths recorded a decline in earnings for the second quarter despite net inflows.

When asset prices rise, managers’ fee revenue generally increase. But the recent pricing competition, which resulted in a fee cut war. Along with other issuers, both BlackRock and State Street have continued to wage a war (read: BlackRock Slashes Fees, ETF Price War Intensifies).

Now, with investors looking for and moving toward cheaper mutual and exchange-traded funds, asset managers’ fee income is sure to get hurt.

BlackRock Misses Estimates

BlackRock’s second-quarter 2019 adjusted earnings of $6.41 per share lagged the Zacks Consensus Estimate of $6.52. Moreover, the figure was 3.8% lower than the year-ago quarter’s number. The second-quarter investment and administrative fees fell by 1.4% year over year.

As of Jun 30, 2019, AUM totaled nearly $6.8 trillion, reflecting rise of 8.6% year over year. Furthermore, during the reported quarter, the company witnessed long-term net inflows of $125.37 billion.

State Street Records Huge Plunge in Earnings

State Street’s second-quarter 2019 adjusted earnings of $1.45 per share beat the Zacks Consensus Estimate of $1.40. However, the figure was 28.9% below the prior-year quarter level.

Total revenues were $2.87 billion, decreasing 2% year over year. Fee revenues declined 5.6% to $2.26 billion. This fall was mainly due to a decrease in all components except processing fees and other revenues. Still, State Street’s assets under management rose to $2.9 trillion from $2.7 trillion.

What Lies Ahead?

“This industry is under pressure,” said Mr. O’Hanley, CEO and president of State Street. He pledged for a “fundamental restructuring of its operating model.” However, he also indicated that “the end of intense pricing pressures from asset managers and asset owners maybe” is round the corner.

Custody banks have been under pressure from buy-side clients in recent years to lower fees, “due to an increasingly stringent regulatory and passive investing environment, along with pressure from their own clients” per State Street CEO. Though there will be persistent price pressure, moderation in excessive re-pricing can be expected going forward.

Other players like T. Rowe Price Group Inc. TROW, Franklin Resources Inc. BEN and Legg Mason Inc. LM are about to report earnings. Analysts are expecting these to suffer the same fate as that of BlackRock and State Street.

T. Rowe Price is expected to release its earnings report on Jul 24. It has a Zacks Rank #1 (Strong Buy) and an Earnings ESP of +0.33% at the time of writing. According to our methodology, a Zacks Rank #1 when combined with a positive Earnings ESP increases our chances of predicting earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Franklin Resources, slated to report on Jul 30 before market opens, has a Zacks Rank #1 and an Earnings ESP of +0.13%. However, Legg Mason, which is going to report on Aug 1, has a Zacks Rank #2 (Buy) and an Earnings ESP of -0.14%, which makes our prediction difficult (read: Global ETF Fee War Heightens With Negative Fee ETF Filed).

Still, these investment management stocks come from a top-ranked Zacks industry (top 36%). Some of the companies have exposure to SPDR S&P Capital Markets ETF KCE. Even though there is near-term pain, the medium-term outlook could be rosy for this Zacks Rank #3 (Hold) ETF.

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State Street Corporation (STT) : Free Stock Analysis Report
 
Legg Mason, Inc. (LM) : Free Stock Analysis Report
 
BlackRock, Inc. (BLK) : Free Stock Analysis Report
 
Franklin Resources, Inc. (BEN) : Free Stock Analysis Report
 
T. Rowe Price Group, Inc. (TROW) : Free Stock Analysis Report
 
SPDR S&P Capital Markets ETF (KCE): ETF Research Reports
 
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