More good news on ETF pricing

by Wayne Ferbert on October 16th, 2012


iShares announced a price cut on several of its key ETFs this week - furthering the "modest" price war that has been on- going in this space for some time now. This is great news for the Buy and Hedge investor. 

We already prefer ETFs because of their low costs and often liquid options markets. If the costs just got even lower, then our portfolio says thank you! Several online brokerages have already lowered or eliminated commissions on many ETFs. Plus Schwab lowered its fees recently on some of its own home grown funds. 

The price cuts by iShares are meaningful to iShares though the investor will notice only small changes when measured in dollar terms. For instance, the iShares S&P Total market ETF is being cut from 20 bps to 7 bps. For the investor, 20 bps was already quite low. The cut will barely be noticeable. But a 65% cut in the revenue for this fund for iShares is significant. 

I say 'kudos' to iShares for doing what is right for their clients and bringing their fees in line with their competitors. 

The move is an interesting one. iShares is owned by Blackrock and they enjoy the largest market share in the ETF space at over 40%. However, Vanguard has been eating in to the market share of iShares for the past 2 years by offering lower cost alternatives. This move looks like a reaction to Vanguard's success.

In general, we are fans of Vanguard's low cost approach as a pioneer in the indexing space.  The problem with Vanguard is the lack of options that trade on their ETFs. Most of their ETFs do not have options.  Of the Vanguard ETFs that do offer options, most are not liquid enough to reliably buy and sell. So, as a Buy and Hedge investor, the Vanguard ETFs become problematic.

That is why this announcement by iShares is so encouraging. We'll need to take a closer look at the markets for the new Core line of ETFs from iShares and start to track them here on this site as tools that are Buy and Hedge worthy - or not.

At first glance, I am not encouraged by the options markets on several of the existing ETFs that already exist that are part of the Core line.  For instance, the ISI, IVV, IJH, AGG, and IJR all have weak or non-existent options markets. 

Maybe the new line of ETFs being launched as part of the core line will have more robust options markets sometime after issuance.

Ultimately, a lower cost ETF family is a good thing for investors. But without an options market to go with it, the Buy and Hedge investor would be left with only the alternative to build a portfolio hedge with a different product. That isn't the end of the world - but it's not ideal either. 


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