Vanguard's Fee Cut Shocker: A Major Threat Or Just Noise For BlackRock?

Vanguard created a buzz through the asset management industry when it decided to cut fees.

For BlackRock Inc BLK, Vanguard's closest competitor in the ETF space, the move might not be as big a deal as it initially seemed.

What Happened: Asset manager Vanguard slashed expense ratios for 168 share classes across 87 mutual funds and ETFs. This brings its asset-weighted average fee down to as low as it can get, at 0.07%.

With $10 trillion in assets under management (AUM), Vanguard's aggressive cost-cutting is a stark contrast to the industry's 0.44% average fee, according to Bloomberg.

This is the largest fee reduction Vanguard has ever undertaken, and it reiterates its reputation as the industry's low-cost leader. The race to offer the cheapest index funds led Vanguard to scoop up a near-record $305 billion in ETF inflows in 2024 alone.

Also Read: Vanguard’s S&P 500 ETF Hits $100 Billion Inflows In 2024: Is SPY’s Crown At Risk?

Despite Vanguard's aggressive move, BlackRock likely isn't sweating too much.

Why Not? Pricing pressure is nothing new, according to a recent JPMorgan research note. Both Vanguard and BlackRock regularly cut ETF fees, reinvesting their benefits of scale into lower costs for customers.

"Since 1975, Vanguard has reduced fund expense ratios more than 2,000 times," the bank noted. "Moreover, BlackRock has a long-standing frame of investing up to 1.5-2.5% of annual iShares revenues back into price. iShares saved investors $630 million+ since 2015 through fee reductions."

An interesting pattern emerged on delving deeper into where Vanguard is lowering fees. The cuts mainly apply to its smaller ETFs—those under $100 billion in AUM. On paper, the funds impacted account for around $1 trillion in assets under management. Although, these are not its flagship products.

Also Read: Vanguard’s VOO Set To Overtake SPY As World’s Largest ETF After Record January Inflows

BlackRock boasts an iShares business with roughly $4.5 trillion in AUM, out of its total $11.5 trillion. In the U.S. equity ETF market, where the two giants go neck-and-neck, BlackRock controls around $1.5 trillion in AUM. But BlackRock's ETF strategy is more diversified than Vanguard's. It caters heavily to institutional investors and offers precision products where liquidity is key. In that context, Vanguard's fee reductions largely target retail investors and buy-and-hold strategies.

Moreover, BlackRock has more than 400 U.S.-listed ETFs, compared to Vanguard's lineup of fewer than 100. While Vanguard's move might seem like a major threat, the actual impact on BlackRock is more minute.

JPMorgan found that a direct price match across all comparable ETFs would mean a potential 3-5% hit to BlackRock's annual revenue—up to $900 million. But more realistically, only around a dozen BlackRock funds could be directly affected. This would put, at most, around $124 million of annual ETF fees at risk, which is far from catastrophic.

What’s Next: Going by past action patterns, JPMorgan doesn’t expect BlackRock to cut fees in response. Previous Vanguard reductions haven't triggered immediate reactions, and BlackRock typically operates with slightly higher fees. For instance, in emerging markets equity, BlackRock's ETFs have consistently charged about 2 basis points more than Vanguard's comparable funds.

Even in fixed-income ETFs — where Vanguard is cutting fees from 4 basis points to 3 basis points — BlackRock's comparable products charge around 15 basis points. That gap suggests the two firms are targeting different investor bases, and if that’s so, then a direct fee war is less likely, the bank noted.

At the end of the day, BlackRock is unlikely to make any knee-jerk pricing moves. Instead, it will likely continue its measured approach—reinvesting 1.5-2.5% of iShares' annual revenue into strategic fee cuts in high-growth areas. While fee compression is an ongoing trend in the industry, BlackRock's earnings are supported by various offsets, and JPMorgan believes that any revenue headwind from Vanguard's move is likely to play out over a longer time period.

So while Vanguard's fee cuts make for a big headline, BlackRock can afford to play the long game.

Read Next:

• Palantir Focused ETFs Spark Investor Interest: Here’s Why

Photo: Shutterstock