It’s tough trying to be the Amazon of ETFs.
While BlackRock raked in $74 billion in ETF flows in the second quarter, the record was in part obscured by revenue that failed to beat estimates. The revenue miss was largely driven by lower performance fees on two long-only funds that didn’t beat their benchmarks by as much as they did a year earlier and weaker securities lending revenue hampered by less M&A activity, said CEO Laurence D. Fink.
Like Amazon did with online retailing, BlackRock got into the ETF arena early and has focused relentlessly on building its business by volume — gathering as much investor money as possible. And just like Jeff Bezos, who ceded profit to win share and trounce rivals, Fink has seen expenses rise.
Revenue, while up, missed estimates for the fourth straight quarter, according to Bloomberg data. BlackRock’s second-quarter costs increased in almost every category including employee compensation and distribution and servicing costs. But AUM increased about 5% from last quarter to $5.7 trillion.
BlackRock shares fell 3.1% on Monday to close at $424.63.
Asset managers are facing pressure as money flows out of more expensive active funds into lower fee passive products. The world’s largest provider of the products is in a better position than most, having entered the ETF business with the purchase of Barclays Global Investors in 2009.
At the same time, BlackRock continues to cut prices on the products, announcing this month a steep cut on a $10 billion ETF that offers exposure to the mortgage-backed bond market. In October, BlackRock reduced fees on 15 core ETFs aimed at price sensitive retail customers and financial advisers and in December reduced expenses on six smart beta ETFs.
BlackRock continues to focus on improving its active business. This year, it fired more than 30 people in its active-equities group and moved billions of dollars into cheaper funds where quants play more of a role.
It’s also trying to adapt to industry pressure by investing in technology. It has made several acquisitions that management says will help diversify its revenue stream and drive more money into its products. The firm last month agreed to buy financial tech company Cachematrix and took a minority stake in European robo-adviser Scalable. It owns robo advice firm FutureAdvisor.
The firm’s average ETF fee slid to about 33 basis points last year, or 33 cents per $100 invested, from about 40 basis points in 2009, according to data from Morningstar. The firm’s average mutual fund fee slid to 108 basis points from about 138 basis points during the same period.