iShares increases expenses on 40 ETFs

In rather surprising news, iShares has filed with the SEC (this is standard practice) to increase fund expenses on 40 some ETFs in the lineup for 2013. Despite tremendous asset gathering from certain products (including the extremely popular $EEM), iShares is increasing investor expenses roughly 2-4% across many products.

This fee increase is how iShares is paying for its ultra-cheap “core” product list – 10 categories where iShares is trying to compete with Vanguard and Schwab for market share. iShares cut costs on these broad-market products and is making up for the lost revenue with fee increases on other products. iShares is effectively doubling down on its bet that investors are attached enough to the MSCI family of benchmarks that they are willing to pay more.

This news brings out a clear difference in how the ownership structure of your mutual fund’s parent company impacts the underlying expenses.  We’ve been saying for some time that it will be extremely difficult for iShares and Schwab to compete on cost with Vanguard, purely because Vanguard’s unique shareholder-owned structure provides inherently lower costs as there are no profit margins required. Time will tell if iShares can sustain the low fund expenses they trotted out with the “core” products.  Meanwhile, Vanguard continues business-as-usual, which means more fee reductions on a regular basis.

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