BlackRock Is Winning at Making Less Money From Junk ETFs

(Bloomberg) -- BlackRock Inc., the world's largest issuer of exchange-traded funds, is winning a battle to attract investors with lower fees, even as success takes its toll.

The iShares Broad USD High Yield Corporate Bond ETF, ticker USHY, added a record $368 million Thursday, after discreetly slashing its fee in March. BlackRock's move came after State Street Corp. lowered the price of one of its junk funds, and was followed by Deutsche Bank AG's DWS Group two weeks later.

USHY is the only one of the three funds -- which now all charge $1.50 for every $1,000 invested -- to add more than $50 million since the fee cuts, data compiled by Bloomberg show. Asset managers are reluctantly accepting lower revenue in exchange for market share as investors seek out the cheapest products. More expensive junk funds run by BlackRock and State Street lost money to withdrawals this week.

“This is being driven by the fee compression,” said Todd Rosenbluth, the director of ETF research at CFRA. “You get a snowball effect when there's money moving into the newer high-yield bond ETFs. It can generate greater interest from other investors because they see the trades were executed in a favorable manner and ask ‘why can't I do that too and pay less money?'”

State Street's larger, pricier fund -- the SPDR Bloomberg Barclays High Yield Bond ETF, known as JNK -- saw almost 10 million shares worth about $356 million trade at 11:45 a.m. on Wednesday; less than one minute later, USHY printed a large buy order.

Trading Down

Defections and cannibalization are growing risks for fund issuers. BlackRock steered into that trend in 2012 when it started a range of cheap “core” funds for buy-and-hold investors, while encouraging active traders to use more established (and liquid) funds that cost more. Some of those low-fee products are now surpassing their pricier siblings.

USHY still has a long way to go in that respect. The fund manages $1.2 billion, about 8 percent of the assets overseen by the iShares iBoxx High Yield Corporate Bond ETF. That fund, which is known as HYG and costs over three times more, saw $354 million pulled on Thursday.

“While we expect HYG will remain the vehicle of choice for professional traders and other investors, USHY is ushering in a new generation of bond ETFs that investors can also use in a variety of ways,” said Melissa Garville, a spokeswoman for BlackRock.

--With assistance from Tom Lagerman.

To contact the reporter on this story: Rachel Evans in New York at revans43@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Brendan Walsh, Randall Jensen

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