The more investors demand low costs, the cheaper it gets to invest.
The latest evidence of this trend is the news that Canada's biggest exchange-traded fund company is slashing fees nine of its basic portfolio-building products. BlackRock Canada's iShares franchise has faced growing competition on price from players like Vanguard, BMO and Horizons. In one fell swoop, it answered the challenge in decisive fashion.
What BlackRock is doing with ETF fees is much the same as RBC Direct Investing's recent introduction of a flat $9.95 fee for online stock trades. Several bank-owned firms quickly followed, thereby ending their practice of charging people with small accounts a minimum of $29 to trade stocks online. At a time when independent firms are charging as little as a penny a share or a flat $4.95, a $29 commissions loses customers.
When an investing firm cuts its costs, it automatically rates a fresh look from investors. In the case of the lower cost iShares ETFs, each becomes a top contender in its category. A prime example is the iShares S&P/TSX Capped Composite Index Fund (XIC), where the management fee has been chopped to 0.05 per cent from 0.25 per cent. This is now the cheapest way to buy broad exposure to the Canadian stock market in an ETF, with the Vanguard FTSE Canada All Cap Index ETF (VCN) next at 0.12 per cent. Another example of iShares's cost cutting in action is the iShares S&P 500 Index Fund (XUS), where the management fee falls to 0.10 from 0.14. The two nearest competitors are ETFs from BMO and Vanguard at 0.15.
The nine iShares with fee reductions comprise a new Core Series of funds that are meant to provide investors with well-diversified basic portfolio building blocks. Other funds in the series:
-iShares S&P/TSX Equity Income Fund (XEI): The management fee falls to 0.20 from 0.55
-iShares High Quality Canadian Bond Fund (CAB): Fell falls to 0.12 from 0.30
-iShares DEX Short Term Corporate + Maple Bond Fund (XSH): To 0.12 from 0.25
-iShares DEX Long Term Bond Fund (XLB): To 0.18 from 0.35
-iShares S&P 500 Index Fund CAD Hedged (XSP): To .10 from up to 0.22
-Shares MSCI EAFE IMI Index Fund (XEF): To 0.20 from 0.30
-iShares MSCI Emerging Markets IMI Index Fund (XEC): To 0.25 from 0.35
The symbolism of these cost cuts matters as much as the savings for iShares clients. BlackRock recognizes that ETF investors demand low costs, and it's obliging with fee cuts that deliver some of the cheapest products around. Now, if only investors would start demanding lower cost mutual funds and advice fees.