As the biggest provider of ETFs, BlackRock is flexing its muscles in its race with Vanguard by expanding its "core select" series.

They're waking up to the fact that a smart marketing and distribution strategy can only go so far against a competitor with lower fees and capable distribution. In other words, with Vanguard's premier status within the retail market and its recent expansion into the advisory market, iShares may feel threatened.

BlackRock's iShares unit cut fees on six existing funds and opened four new products. The provider introduced its core lineup in October 2012 and rolled out a similar group of funds in Europe earlier this month. "We are now taking buy-and-hold investing up a level with greater choice and flexibility," Patrick Dunne, iShares' head of global markets and investments, said in a statement.

Morningstar's Michael Rawson applauds iShares' strategy, as ultimately lower fees are good for investors. Yet he questions why the provider has not applied the low pricing strategy more broadly. MME put the question to iShares but they declined to comment.

Rawson notes that there are four basic ingredients for provider success:

1. strong brand name

2. strong performance

3. strong distribution

4. low prices

There's little doubt that iShares has built its success largely by targeting advisors. "But despite iShares' strong brand, they have lost market share to Vanguard due to their comparative absence from the retail space, and a push to retail may be their attempt to rescue themselves," Rawson notes.

iShares wants to have their cake and eat it too, he says, charging high fees where there is less competition and reluctantly cutting fees where competition is fierce.

Vanguard, meanwhile, offers low fees across the board. While Vanguard is just finally bringing their message to advisors, they aren't changing their funds. "Commission based advisors never had a reason to use Vanguard products," Rawson says. "Today, there are more and more fee-based advisors who do not care about loads or commissions, so they choose Vanguard as the lowest cost provider."

Distribution and marketing will only take providers so far. In the end, fees and the quality of products will determine the success of iShares and Vanguard in the retail and advisory ETF space.

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