ETF Wars

In the world of investing marketing goes a long way. It’s the intoxicating smell of implied success, or maybe the flashy videos and cute talking babies that draws people in. Yep, it goes a very long way — which is why Wall Street marketing budgets are absolutely monstrous.

Actually, spending piles of green pretty much always goes a long way toward attracting pretty much all of us little busy bees to the flower of promise. Coke is clearly better than Pepsi because those Polar Bears are so darned cute. And who cares if that person in the gym is using enhancing agents to look so good ?! Right? Form over substance is always the easiest path in the beginning. But once we all get close enough to see the flash & glitz is actually a bug-zapping death ray of blue light, it’s pretty much the darwinian re-investment model in its purest form at that point. No matter how much you warn some people, they won’t be able to resist that Snuggies for Dogs infomercial.

Fortunately, in the investing world, we’re not just dumb animals sipping from the same old watering hole, waiting to have our faces ripped off (again) — we’ve evolved, especially us independent Financial Advisors. And right now those in the know are voting pretty heavily with their wallets despite the conventional laws of attraction.

From ETFtrends:

BlackRock’s ETF unit iShares is by far the largest ETF provider in the world but rivals are chipping away at the leader’s market share by competing on cost, according to a report.

“They are in the middle of a price war whether they admit it or not,” said David Nadig, director of research at IndexUniverse, in a Reuters article this week.

Specifically, ETF competitor Vanguard is enjoying strong inflows to its low-fee funds. Vanguard ETFs often undercut iShares funds on expense ratios.

The head-to-head matchup between Vanguard MSCI Emerging Markets (NYSEArca: VWO) and iShares MSCI Emerging Markets (NYSEArca: EEM) is a striking example.

The two ETFs track the same emerging market index, but VWO has an expense ratio of 0.2% while EEM charges 0.67%.

Investors have pumped $7.4 billion into VWO this year as of June 30, according to data from the ETF Industry Association. Year to date, EEM has gathered net inflows of $693 million, according to the ETF Industry Association. In 2011, investors pulled $8.5 billion from EEM, while VWO recorded net inflows of $5.3 billion last year. 

Investors and advisors clearly prefer the lower-cost Vanguard ETF for emerging markets. 

Vanguard ETFs are structured as separate share classes of the firm’s existing index funds. 

“If Vanguard has the same ETFs that are identical in makeup to iShares and two-third of the cost, it is my fiduciary responsibility to my clients to switch,” a financial advisor told Reuters.

So — If you’re going to use indexes to invest as your weapon of choice, a big part of the decision should be small costs; it’s just that simple. And if it “Looks this good on paper, we’re in the kill zone, pal. Lock and load.” 

Keep Reading:

BlackRock’s iShares ETFs ‘In the Middle of a Price War’