Blackrock cuts its fees on two iShares ETFs

On 20 Feb 2023, Blackrock took the incredible step of cutting their fees on two of their most popular core ETFs.

The first of the two is IOZ - iShares Core S&P/ASX 200 ETF, which has reduced its annual fee from 0.09% to 0.05%. The IOZ ETF is built to closely track the S&P/ASX 200 index.

The second is IAF - iShares Core Composite Bond ETF, which has reduced its annual fee from 0.15% to 0.10%. IAF is a diversified portfolio of Australian bonds.

Blackrock describes its core ETFs as the ’basic building blocks’ of an investment portfolio, and these two ETFs are just that. Both are key components of many of InvestSMART's PMAs (Professionally Managed Accounts).

To see if your portfolio has benefitted from the price cut, here are the weightings of IOZ and IAF in each of Investsmart’s PMA portfolios, as at 31 Dec 2022.

It should be noted too that the fee reductions relate to the ‘indirect’ fees’ in the PMA portfolios. These fees are charged internally within the ETF (by the ETF provider), and are reflected in the ETF’s daily price.

The indirect fees for the PMA portfolios can range from 0.09% p.a. to 0.30% p.a., though now they are a little lower. Investsmart closely monitors these fees to keep them to a minimum.

All things being equal, any reduction in the indirect fee charged by an ETF, will translate to a slightly better performance from that ETF.

Every little bit counts

When it comes to money every little bit counts, and that ‘little bit’ can tend to get much bigger when it compounds over years and decades. That’s why fee reductions, even if they don’t appear massive at first, can make a big difference.

Could the Blackrock fees be lowered even further? The last time that IOZ was lowered was in June 2019, when the annual fee was cut from 0.15% to 0.09%. Now that it’s been cut further to 0.05%, it’s hard to think it could ever be cut again, but you just never know.

One thing for sure is that with everything going up in price at the moment, it’s great to see some things coming down. So, how does Blackrock do it?

Economies of Scale

Blackrock is the world’s largest asset manager with US$8.5 trillion in AUM (Assets Under Management). In size, it’s closely followed by Vanguard and then State Street.

With Blackrock’s size comes scale, which enables the company to charge low fees yet still make a sizeable profit. By dropping their fees even lower, it attracts more people to their funds, which then grows AUM and market share, thus increasing their profits. As a result, they can then drop their fees even lower, and on it goes, in one big feedback loop.

This of course makes it harder for smaller ETF providers to compete, but it’s absolutely wonderful for investors.

Given the quality of IOZ and IAF, this fee reduction has certainly come along at a great time for investors.

Click here to find out more about InvestSMART's Professionally Managed Accounts or chat with the team in the bottom right of your screen.