The exchange-traded fund industry has gone through a big transformation recently. For years, the key to ETF success was to come up with innovative new products that would attract assets. Lately, though, costs have come to the forefront, and ETF providers have faced huge pressure to keep competitive.

Yesterday, BlackRock (BLK 1.35%) did another round of fee cuts on many of its popular iShares ETF offerings. But it also did something that at first seems counterintuitive, structuring its cuts in a way that actually creates new funds rather than affecting existing ones. Let's take a look at what's behind BlackRock's decision and what impact it will have on the way you and millions of people invest.

Getting cheaper
BlackRock actually couched its fee-cutting announcement in a broader message about creating what it calls Core Series ETFs, purportedly tailored for long-term buy-and-hold investors. The company is taking its existing S&P 500, mid-cap, small-cap, and total-market stock ETFs and slashing fees on them. Similarly, it's making fee cuts to its benchmark bond-market ETF.

But in the international realm, BlackRock is doing something a bit different. Rather than cutting fees on its existing offerings, the company is instead creating brand-new ETFs for its Core Series. The new ETFs, which will offer exposure to developed, emerging, and whole-world international stocks, should begin trading later this month. That's also the tack it's taking with a new short-term bond ETF, which will join the iShares lineup as well.

Two funds are better than one?
It's easy to applaud iShares for cutting fees on some of its popular existing ETFs. With more than $30 billion in its S&P 500 fund, even the modest decline in fees from 0.09% to 0.07% will have a measurable overall impact on its revenue. The cut on its $15 billion iShares Barclays Aggregate Bond Fund (AGG 0.06%), slashing fees by more than half, will have an even bigger boost to investors' net income.

Yet with that in mind, why did iShares go with new funds in the international realm rather than changing its existing funds, especially in the hotly contested emerging-markets realm, where it competes against Vanguard? A blog entry from Barron's suggests that because the new iShares ETF will track a variant of MSCI's (MSCI 1.00%) emergin- market benchmark that focuses on investable markets, it will be able to undercut its existing emerging-market ETF counterpart.

That may make sense from a marketing standpoint, but for existing investors, it's a colossal pain. Rather than benefiting from lower fees, investors will have to sell their shares to buy their cheaper counterparts. As a taxable event, that will also potentially trigger capital gains liability. As a result, many investors with extensive gains who decide the fee savings aren't worth the big tax hit will remain stuck in the higher-cost product.

Keeping costs down
It was clear that BlackRock needed to make some response to the cuts that Vanguard and Schwab (SCHW 1.14%) have made to their ETF fees. As both companies take steps toward cutting costs to the bone, the iShares family of ETFs was in danger of isolating itself as the institutional choice for ETFs. That's obviously a lucrative market, but BlackRock's decision reopens the door to capture retail investors as well.

The challenge, though, will be what happens at brokerage companies Fidelity and TD AMERITRADE (AMTD), both of which offer commission-free ETFs that are affected by the move. In particular, whether iShares will amend its arrangement with Fidelity to include the Core Series versions of new ETFs to replace its existing offerings could have major implications on its customer relationship going forward. For TD AMERITRADE, it will be interesting to see whether it replaces funds on its list, adds new ones, or leaves the list untouched.

Wait and see
Whether the latest move from BlackRock turns out to be a cost-saver or a colossal hassle remains to be seen. For now, though, it's good to see the industry's leading ETF manager at least making some move toward reducing fees for investors.