In a research note titled “What ails the ETF king? A case of Vanguarditis” the analysis arm of Sanford C Bernstein, the Wall Street sell-side research firm, goes as far as to say iShares’ loss of ETF market share is suppressing its parent company’s share price.
“BlackRock shares have languished behind the market and every traditional asset manager peer since Barclays’ 18 May announcement that it would sell its $6.1bn ownership in BlackRock stock.
“Some say the $160 price of the Barclays’ offering is anchoring valuation and others cite an over-supply of the stock as investors continue to work off large allocations from the deal.
“But any discount of technical origin implies a buying opportunity that should ultimately dissipate. A fundamental explanation for the underperformance is wanting,” Bernstein Research explained.
It continued that commentary from CEO of BlackRock, Larry Fink, regarding a ‘plan’ to address the issue of its ongoing loss of the ETF market share to Vanguard had been followed by “conjecture about price cuts on profitable ETF products”.
Vital stats
Latest research from ETFGI, an independent ETF research firm run by ex-iShares Deborah Fuhr, showed Vanguard gathered the largest net inflows globally in May with $6.8bn and also in the year-to-date (May) with $28.6bn.
Meanwhile iShares only attracted $18.4bn in the year-to-date to May, although it also had a 42.2% share of the global ETF market at that stage, with Vanguard third in line behind SPDR’s 15.2% share with 13.9%.
In the US BlackRock’s market share as at May was 44.3%, compared with 20.2% for SPDR and 19.7% for Vanguard. ETFGI expects to update these figures with an August breakdown any day now.
Even BlackRock’s own latest ETP landscape report showed how Vanguard has pulled ahead in some metrics. In the year-to-date (to July) Vanguard’s MSCI Emerging Markets ETF attracted $8.9bn in inflows, making it the top ranked ETP for YTD net new assets.
iShares’ own top selling ETP is its iBoxx $ Investment Grade Corporate Bond Fund which attracted $5.1bn in net new assets in the seven months to the end of July.
Extent of the loss
“To be fair, it is ambiguous how much of the share shift to Vanguard is due to bona fide competition versus rising ETF demand in the direct retail channel where Vanguard has formidable distribution,” the note said.
But there are indications the firm has also lost institutional share in some key products, Bernstein added.
Despite this it does not expect price cuts across BlackRock’s ETF range, as it has not been proven that pricing is the ultimate consideration for investors.
“We expect BlackRock’s management to be thoughtful, rational and targeted with any revisions to its pricing strategy. We estimate an absolute worst case 12% earnings per share hit, under the very drastic assumption that BlackRock matches Vanguard fees in all major substitutable ETFs. We estimate a 3-7% EPS hit in a more realistic case where fees for select ETFs are reduced and modest cost leverage is achieved.”
