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ETF Fee Wars Spill Into Index-Licensing Business


The ETF fee war is morphing into an index war.

On Tuesday, Vanguard said it is swapping out of MSCI indices in several funds and ETFs, in favor of benchmarks managed by FTSE and the University of Chicago’s Center for Research in Security Prices (CRSP).

Vanguard said the move is “expected to result in considerable savings for the funds’ shareholders over time.”

It appears that Vanguard will pay lower fees to license the new FTSE and CRSP benchmarks, which will allow Vanguard to further reduce expense ratios in its ETFs. In other words, Vanguard should end up passing along the savings to ETF investors. [Vanguard Changing Indices for Several ETFs]

Vanguard’s announcement Tuesday comes after Charles Schwab recently announced ETF fee cuts that made broad-based Schwab funds the cheapest products on the market.

“If you undercut us today, be prepared to do it again tomorrow,” Tim Buckley, who takes over as Vanguard’s chief investment officer in January, told Reuters. “We won’t just lower costs on one or two funds, we will do it across the board.”

“Vanguard is citing the change as a way to keep expenses low. While the timing is likely coincidental to Schwab’s expense cuts announced in September, the move could help Vanguard grow its asset base as investors use the expense ratio in their decision making process,” Todd Rosenbluth, ETF analyst with S&P Capital IQ, said Tuesday.

Vanguard’s market share gains in ETFs this year have been helped by its low-cost structure, he added.

“Much of Vanguard’s recent growth has come from its exchange traded fund business. The firm’s U.S. market share in ETFs has increased 29% in the past two years,” according to the Reuters report. “It now holds 17.9% of the market, whittling away at the dominance of competitor BlackRock … which has seen its market share fall to 40.6% from 46.6% over the same period.”

Last month, BlackRock CEO Larry Fink said the firm plans to cut management fees charged by some of its core-strategy iShares ETFs. [iShares to Cut Some ETF Fees]

Vanguard’s announcement Tuesday signals the ETF cost war is spilling over into the index business. Benchmark providers such as S&P, Dow Jones and MSCI typically charge fees to allow asset managers to license their indices.

Shares of MSCI (MSCI) tumbled nearly 30% Tuesday after Vanguard said it was dropping MSCI indices at 22 of its funds, including ETFs. [MSCI Shares Plunge]

MSCI’s annualized revenue and operating income associated with the Vanguard funds being transitioned are approximately $24 million, MSCI said in a statement.

“An expense ratio should be just one factor that investors look at in weighing different investment choices. Because the Vanguard ETFs will use different benchmarks going forward, investors will need to understand what is inside each from a sector and country diversification standpoint as well as the risk traits of the underlying holdings,” said Rosenbluth at S&P Capital IQ.

“This move is similar to an active mutual fund making a manager change. The construct of the ETF will be different and investors need to rethink if the ETF will have the best performance, risk and cost attributes vis-a-vis their alternatives,” the analyst said.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.