After almost 20 years, it is time to ask why BlackRock’s legacy global equity ETF still houses billions of dollars of investor assets while charging four times as much as its peers tracking the MSCI World index.
The $6.3bn iShares MSCI World UCITS ETF (IWRD) may not be the longest-standing ETF on BlackRock’s European roster, however, IWRD is Europe’s oldest ETF offering exposure to MSCI’s flagship index after debuting in 2005.
The problem is BlackRock itself made the product outdated within just years of its arrival.
While 2009 will be remembered as the year Larry Fink’s asset management behemoth acquired Barclays Global Investors (BGI) and its iShares franchise for $13.5bn – a move that sealed its fate as the dominant force in passive investing – it was also the year the company broke ground on its ‘core’ range of low-cost ETFs such as the iShares Core MSCI World UCITS ETF (SWDA).
Although four years might not seem like a long time, it is within the relatively short history of ETFs.
In its early years, IWRD navigated uncharted waters by offering liquid exposure to MSCI World in an ETF wrapper to European investors, which goes some way to explaining its considerable 0.50% total expense ratio (TER).
For context, the current asset-weighted average fee for equity UCITS ETFs – thematic and active strategies included – is 0.22%, according to Bloomberg Intelligence data.
A BlackRock spokesperson told ETF Stream a global equity exposure is not cheap to operate without considerable scale, given the need to manage currencies, time zones and settlement of securities across different jurisdictions.
Following early traction on IWRD, BlackRock had the proof of concept it needed to severely undercut its legacy strategy by launching SWDA – with a 0.20% fee – just three months after completing the BGI acquisition.
Some 14 years on and SWDA is now considerably costlier than rival products from Amundi, DWS and State Street Global Advisors (SSGA) which carry a 0.12% fee, however, its early mover advantage, tight three-basis-point (bps) bid-ask spread and the power of the BlackRock brand means SWDA remains Europe’s largest global equity ETF with $59bn assets under management (AUM).
It is now second only in the UCITS ETF rankings to the $64.4bn iShares Core S&P 500 UCITS ETF (CSPX), after topping the inflow tables in 2021 and 2022 with $16.5bn net new assets in just 24 months.
Investors should note, however, the IWRD and SWDA comparison is just one example of BlackRock keeping higher-cost legacy products online alongside cheaper ‘core’ equivalents that launched subsequently.
Around 13 years ago, BlackRock unveiled its ‘core’ S&P 500 and FTSE 100 ETFs with TERs of 0.07% and initially kept the legacy equivalent product fees at 0.40% apiece, before eventually equalising the charges as “investors saw through this manoeuvre”, according to Peter Sleep, senior investment manager at 7IM.
Last year, BlackRock launched the iShares Broad $ High Yield Corp Bond UCITS ETF (HYUS) and iShares Broad € High Yield Corp Bond UCITS ETF (EH1Y), which captured similar exposures to two of its existing ETFs charging between 0.50-0.55% and generating over $20m in annual revenue.
“Rather than cut fees and revenues, BlackRock has launched a nearly identical product at a lower price point – in this case at 25bps,” Sleep told ETF Stream. “Price sensitive clients can buy the new product, but experience shows that many investors will remain in the more expensive.”
It is also worth noting BlackRock is not the only ETF issuer choosing to offer lower-cost alternatives of the same strategy to ignite interest among price-conscious investors, even within MSCI World ETF space.
DWS launched the accumulating – or capitalising – ‘1C’ share class of its $11.2bn Xtrackers MSCI World UCITS ETF (XDWD) in 2014 and the distributing ‘1D’ share class a year later with matching fees of 0.19%.
After lagging on assets, the firm chose to slash the fee on the 1D share class to 0.12% in 2022 to make it Europe’s joint-cheapest world ETF, while keeping the 1C share class unchanged.
Michael Mohr, global head of Xtrackers products at DWS, said: “Many investors still prefer the capitalising share class to participate in the long-term compounding effect when distributions are being reinvested automatically.
“It should also be noted that the share classes differ in related product features such as listing and registration, which also affects investor demand.”
The latter point is less relevant for BlackRock’s two ETFs, given they are both listed across all of Europe’s largest exchanges and SWDA is registered in 21 of the 22 countries where IWRD is registered – with Belgium being the only exception.
The two world ETFs may just be a fable of how cost is just one of several factors considered by prospective ETF investors – and IWRD’s lights will stay on as long as $6.3bn of investor assets ignore the cheaper, mirroring strategies casting a shadow over it.
