Hoping for a Vanguard Takeover of iShares

There apparently is a rumor going around that Vanguard Group may buy Barclays' (BCS) iShares family of exchange-traded funds before the June 16 deadline that Barclays’ has for shopping the asset around (hat tip to Preet Banerjee). There will be a big break-up fee of $175-million (U.S.) to pay CVC Capital Partners but iShares fund-holders may nevertheless be better off with Vanguard as owner.

It seems to me that Vanguard, which is one of the lowest-cost providers of investment funds, is more likely not to raise management expense ratios (MERs). Indeed, I suspect they may reduce the MERs — and possibly by substantial amounts.

They could do this by paying a higher price for iShares with its securities-lending business thrown in (CVC is buying iShares without the securities-lending business). With the revenues derived from securities lending, Vanguard could bring its low-cost business model to iShares.

Barclays is presently taking a 50% cut of the revenues from iShares’ securities lending for itself. If Vanguard follows its practice of rebating lending fees (net of expenses) to fund holders, much of this 50% cut should be rebated to iShares fund-holders in the form of lower MERs. And since the dollar amounts are large and growing, the MERs could possibly come down substantially.

Now there is something to rejoice. It was somewhat with tongue in check that I suggested in my previous post that it would be nice to be able to buy the iShares S&P 500 Index Fund (IVV) with a MER close to 0% - but maybe the reality is closer than we think? Then again, all this speculation over a Vanguard takeover may turn out to be — alas — just that.

Comments

[Victhom:]

Blackrock or Fidelity could get BGI for $12B US
you are slow in the news,....LOL

Barclays May Sell BGI for as Much as $12 Billion, WSJ Reports
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By Dan Hart

May 16 (Bloomberg) -- Barclays Plc, the U.K.’s third- biggest bank, is in talks to sell its asset management unit for as much as $12 billion, with BlackRock Inc. among interested bidders, the Wall Street Journal said, citing unidentified people familiar with the matter.

The business includes the exchange-traded funds unit iShares, which Barclays agreed to sell to CVC Capital Partners Ltd. for $4.4 billion two months ago, the newspaper said.

The iShares and securities-lending units each generate as much as a third of the profit for the Barclays Global Investors subsidiary, the newspaper said, citing a person familiar with the situation. BGI had a pretax profit of 595 million pounds ($903 million) in 2008, the Journal said.

Barclays does not comment on speculative stories, a company spokeswoman in London said when contacted by Bloomberg today.

To contact the reporter on this story: Dan Hart in Washington at [e-mail]

Last Updated: May 16, 2009 10:51 EDT

Jun 04 05:40 AM