Move to a new family of benchmarks could portend a new front in the ETF fee war
Move to a new family of benchmarks could portend a new front in the ETF fee war © REUTERS

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BlackRock will revamp a set of iShares Morningstar-backed ETFs to better reflect how retail investors allocate to growth and value stocks.

The move to a new family of more diversified benchmarks from the low-cost index provider could portend a new front in the ETF fee war, one analyst said.

Nine iShares ETFs representing about $7bn in assets in March will move their benchmarks from Morningstar’s US Style Index family to the new Morningstar Broad Style Index family, BlackRock announced on Tuesday. The Morningstar Broad Style Indexes will go live in January, the announcement states.

The new indices do not change the way Morningstar, the inventor of the nine-box size and style classification system, defines growth or value, but it does change how it groups companies within the style boxes. The result should be funds that have a far more diversified portfolio of stocks, in some cases more than eight times as many, BlackRock’s regulatory disclosures show.

This article was previously published by Ignites, a title owned by the FT Group.

BlackRock hopes that the revised products will play a significant role in the wealth market as retail investors and advisers come back to the principles of style investing in portfolio construction, either through models or on their own, said Armando Senra, head of iShares Americas.

Extending the relationship with Morningstar, the creator of the style box, allows the company to partner with an influential voice among retail investors and financial advisers — and one that is committed to driving down the cost of index investing, he added.

“It’s very much offering value for the cost-conscious investor,” Mr Senra said.

But there is a hitch: the products, which charge each between 20 and 30 basis points in fees, are more expensive than iShares’s cheapest style-based ETFs. The $10bn Core S&P US Growth ETF and $7.4bn Core S&P US Value ETF each charge 4 bps.

Regulatory filings do not indicate whether BlackRock will cut fees on the products, and company officials declined to comment on whether the firm will reduce fees. But one analyst said the company intended to go after the lowest-cost options in the market.

“This sets the stage for iShares to ultimately slash the fees for these ETFs. They are using the word ‘value’ to describe them — and to price them competitively with Vanguard,” said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

Mr Rosenbluth pointed to Morningstar’s longstanding goal of disrupting the index licensing-fee market. Morningstar has moved to give some of its indices away for free to active managers for benchmarking, and has called broadly for asset managers to scrutinise licensing fees.

There are other indications that a repositioning is under way. In conjunction with the index shift, BlackRock will execute share splits on the ETFs that will bring their net asset values to less than $100 per share, from between $200 and $400 per share, according to one of the SEC filings. The asset manager will also change the tickers on the ETFs to be more akin to its low-cost core series. The ETFs’ names will not include core, however.

BlackRock executives declined to comment specifically on how the revamped products would align with existing core growth and value ETFs.

But investors should expect to see the core series “basically focus on the blended category, the one-stop shopping for large-cap, mid-cap and small-cap” exposures, said Chad Slawner, head of US iShares product and strategy.

BlackRock’s strategy of segmenting its sprawling product line-up among different user bases — in several cases having multiple families of products focused on the same investing strategy — dates at least as far back as the 2012 launch of its low-cost core suite.

Within size and style US equity ETFs, BlackRock currently runs 46 different products from three different index providers: S&P Dow Jones Indices, FTSE Russell and Morningstar.

“There’s going to be a segment [of clients] looking for the Russell suite of product offerings, there’s going to be a segment looking for what we have in Core and S&P and Morningstar,” Mr Senra said. “When you look across our entire breadth of products, it’s about: ‘How do we give access and how do we give choice to investors?’”

Investors choosing the Morningstar index-tracking products will find a set of benchmarks that reflect how more investors are building their US equity portfolios using style box investing, Mr Slawner said.

Indeed, Morningstar’s work on a new US-style index family is part of the company’s broader index expansion effort, officials say. While the existing nine-box framework is a very precise measurement for understanding how different parts of the market perform, it did not match as well to how managers were building portfolios.

“The style box isn’t changing, but for the purposes of benchmarking performance, we recognise that people were using style in different ways,” said Rolf Agather, head of research and product, indices at Morningstar. The existing nine-box framework will still be offered to clients and used internally, he said.

But the new index family looks more like a four-box construct, dividing stocks into large and small, and value and growth. The index family still covers the nine boxes, but the large-cap indexes now incorporate more mid-cap stocks, while the former “core” style boxes have been renamed “blend” to reflect that they include companies with a mix of growth and value characteristics.

While the indices may be less “style pure” than the nine-box metric, “they are better tools for people using the style box in the construction of portfolios,” Mr Agather said.

*Ignites is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at

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