(Bloomberg News) Vanguard Emerging Market ETF became the third-largest U.S. exchange-traded fund this week, surpassing a rival BlackRock Inc. fund that just a year ago was twice as big, and adding to evidence that investors are migrating to the cheapest offerings.

The Vanguard fund had $46.2 billion as of yesterday, more than the $46 billion in iShares MSCI Emerging Markets, according to data compiled by Bloomberg. At the end of 2009, the BlackRock fund was twice as large as Vanguard's, according to Chicago- based Morningstar Inc.

"There is a pricing war going on," said Paul Justice, director of ETF research at Morningstar. "Investors see these as commodities and are saying, 'Why not go for the one with the lowest expense.' "

Vanguard has captured market share in the almost $1 trillion U.S. market for ETFs by using the same low-price strategy it employed to become the nation's largest mutual-fund firm. Vanguard's emerging market ETF charges a fee of 27 cents per $100 invested, compared with 69 cents for its BlackRock rival.

Vanguard's competitors may be forced to cut prices on certain products, said Dave Nadig, director of research at Index Universe, a San Francisco-based financial media company.

"BlackRock must be wringing its hands," he said.

The two emerging-market ETFs ranked third and fourth in asset size as of December 31, according to State Street Corp. The biggest ETF was the $90 billion SPDR S&P 500 ETF Trust sold by State Street.

'Track Record'

While both emerging-markets funds attempt to track the same index, the MSCI Emerging Markets Index, their results have not been identical. Since U.S. stocks reached a 12-year low March 9, 2009, the Vanguard ETF returned 151% compared with 137% for the BlackRock fund, data compiled by Bloomberg show. The index returned 150%.

Because emerging-market stocks are not always easy to buy, it can difficult to duplicate the performance of the underlying index, said Paul Justice from Morningstar.

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