David Fabian: One of the reasons I love exchange-traded funds is the majority of the industries’ assets are concentrated in products with very low fees. Sure there are a few rogue funds out there with 2%+ expense ratios, but these are primarily relegated to the black corners of obscurity.
I’m more focused on companies such as Vanguard, Charles Schwab, and Fidelity that have built solid platforms in the ETF world because of their commitment to offering the lowest costs possible for investors. This ensures consumers have access to a diversified mix of stocks or bonds with very little drag on performance versus the underlying benchmark.
The iShares brand is a perennial juggernaut in the ETF world that has been slower to trim fees on several of its flagship funds. This may be the result of index provider costs, operating costs, or a whole host of other factors. Furthermore, it may just be because the assets in the fund are sticky and they know investors will own it regardless of the expense ratio.
Nevertheless, it may be time for Blackrock to review these areas and consider making changes in light of competition and doing the right thing for their investors.
#1: iShares MSCI Emerging Markets ETF (EEM)
EEM is the 12th largest U.S.-listed exchange-traded fund by asset size, with over $26 billion under management. This diversified international equity ETF sports an expense ratio of 0.68%, which is more than 4 times greater than the Vanguard FTSE Emerging Market ETF (VWO) at 0.15%.
To put that in perspective, there isn’t a single ETF in the top 50 funds (by assets) with a greater expense ratio than EEM. Despite the fact that VWO and EEM track different indexes, they have shown remarkable correlation over the last 5 years. In fact, VWO is leading in total return over that time frame in part because of its lower fee structure.
It’s also worth noting that the iShares MSCI EAFE ETF (EFA) chares an expense ratio of 0.33%, which seems more in line with an appropriate point for EEM.
#2: iShares iBoxx $ High Yield Corporate Bond (HYG)
Investors love high yield bonds, yet the 0.50% expense ratio on HYG seems quite excessive. This ETF has $13 billion dedicated to over 1,000 fixed-income securities of companies with below-investment grade credit quality.
The comparable SPDR Barclays High Yield Bond ETF (JNK) sports an expense ratio of 0.40%, which is 20% less than HYG. In addition, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) offers a miniscule expense ratio of just 0.15%. Tracking an index of junk bonds versus investment grade bonds doesn’t seem like it would warrant 3 times the cost.
My preference would be to see the expense ratio for HYG cut in half, which would put the fund at a distinct advantage over its competition.