AGG iShares Core US Aggregate Bond

Thanks to the immense popularity of ETFs in recent years, there has been a race to the bottom in the exchange-traded fund business on the cost front for gaining market share. Many ETF sponsors have reduced costs to make their funds the cheapest in a particular category, heating up the competition in the space.

Cost is an important element in selecting funds in the portfolio, especially when two funds track similar, or even identical, indexes. Generally, the low-cost product overtakes the high-cost product and leads in AUM when cost is really the only big difference between the two funds.

This trend has been especially important for iShares, despite their solid performance this year as the company has pulled in about $50 billion in AUM in the first nine months of the year.

Though the firm has among the most in asset inflows, it is losing share in large liquid funds to low cost ETFs managed by Vanguard and other low cost providers like Schwab. Still, iShares occupies about 41% of the U.S. market share with 276 funds in its total lineup, a figure that is down from 48% reported in 2009.

As a result, iShares recently announced plans to cut the expense ratio on six core ETFs, making them some of the cheapest offerings in each of their respective categories. The cut follows the latest fee reductions by Vanguard and Charles Schwab to boost its assets inflows amid stiff competition (read: Charles Schwab Slashes Fees on Entire ETF Lineup).

The products that iShares announced the cuts on are not unimportant funds either, as iShares has slashed costs on two important ETFs, Core S&P 500 ETF (IVV) and Core S&P Total U.S. Stock Market ETF (ISI), funds that now have expense ratios of just 0.07% per year, making them some of the cheapest ETFs in any category (ISI’s ticker will change to ITOT as well).

Though IVV fails in comparison to VOO in terms of expense ratio by two basis points, the product so far attracted $33.2 billion of assets compared to $5.7 billion for VOO, suggesting that it could have a much easier time keeping assets after this cut.  

The other three ETFs – Core S&P Mid-Cap ETF (IJH), Core S&P Small-Cap ETF (IJR) and Core Total U.S. Bond Market ETF (AGG) – will now have expense ratios of 0.15%, 0.16% and 0.08%, respectively. IJH is the low-cost choice in tracking the S&P MidCap 400 Index, outstripping IVOO, a Vanguard product, which has an expense ratio of 0.17%.   

Among the three funds tracking the S&P SmallCap 600 Index, IJR and VIOO will be the cheapest funds in the category. On the other hand, AGG is the cheapest fund after Charles Schwab’s SCHZ that tracks the Barclays Capital U.S. Aggregate Bond Index. AGG has so far managed assets of about $15.9 billion while SCHZ has only $336.6 million in AUM (read: Ten Biggest U.S. Equity Market ETFs).

iShares also cut the expense ratio on Core Long-Term U.S. Bond ETF (GLJ) to 0.12% from 0.20% and decided to change the tracking index to Barclays US Long Government/Credit Bond. Furthermore, the new ticker name will be ILTB instead of GLJ.

The Vanguard product, Long-Term Bond ETF (BLV), tracks the same index and charges 11 bps in fees per year to investors. We have seen that the Vanguard product has attracted around $587 million more assets than iShares’ product owing to lower fees of 1 bps.  

While these fee reductions are expected to take a toll on iShares’ revenue by $35–$40 million, it would boost more cash inflows for the products. Further, the firm introduced four new low-fee ETFs to its lineup in order to attract long-term investors instead of cutting fees on the old funds (read: Who Says iShares ETFs Aren’t Cheap?).

The new funds - Core MSCI Total International Stock ETF (IXUS), Core MSCI Emerging Markets ETF (IEMG), Core MSCI EAFE ETF (IEFA) and Core Short-Term U.S. Bond ETF (ISTB) – will have expense ratios of 0.16%, 0.18%, 0.14% and 0.12%, respectively.

These funds are similar to iShares’ four existing ETFs - MSCI ACWI ex US Index Fund (ACWX), MSCI Emerging Markets Index Fund (EEM), MSCI EAFE Index Fund (EFA) and Barclays 1-3 Year Treasury Bond Fund (SHY) that have expense ratios of 0.34%, 0.67%, 0.34% and 0.15%, respectively.

Since these funds have a huge asset base and relatively higher expense ratios, iShares might have lost $259 million in annual revenue had it simply cut fees on them instead of introducing the new products, suggesting that the San Francisco-based firm is testing a novel strategy of new launches instead of cuts on at least some of its funds.

This low-cost strategy may also bolster the firm’s competitive position against its rivals such as Vanguard, Charles Schwab and State Street in a number of important ETF categories across a number of asset classes.

This is an interesting plan that has immense ramifications for the broader ETF world. It suggests that the fight for low-cost products is intensifying and a number of issuers are coming up with low fees as cheap funds attract more inflows. The approach helps investors to build a diversified portfolio with lower cost and higher returns.

For investors looking for a list of iShares fees changes, we have highlighted the company’s products below, by AUM, along with their old and new expense ratios (see more on ETFs in the Zacks ETF Center):

 

ETF	AUM (in millions) as of October 17	New Expense Ratio	Old Expense Ratio
IVV	$33,237	0.07%	0.09%
ISI/ITOT	$365	0.07%	0.20%
IJH	$11,421	0.15%	0.21%
IJR	$7,925	0.16%	0.22%
AGG	$15,893	0.08%	0.20%
GLJ/ILTB	$200	0.12%	0.20%

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ISHARS-BR AG BD (AGG): ETF Research Reports
 
(GLJ): ETF Research Reports
 
ISHARS-SP MID (IJH): ETF Research Reports
 
ISHARS-SP SC600 (IJR): ETF Research Reports
 
ISHARS-10+Y GCB (ILTB): ETF Research Reports
 
(ISI): ETF Research Reports
 
ISHARS-1500 IDX (ITOT): ETF Research Reports
 
ISHARS-SP500 (IVV): ETF Research Reports
 
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