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Fidelity's Dance With BlackRock Good Start

March 20, 2013
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Fidelity’s new and expanded commission-free trading program is a net positive for investors.

Fidelity and BlackRock announced last week a new partnership that, among other things, will include an expansion of Fidelity’s offering of commission-free trading for iShares ETFs from 30 to 65 funds. It seems to me it’s a good move, even if some advisors objected.

The new program, which includes 14 of the original funds and 51 new options, didn’t sit well with many advisors, whose concerns fell into three categories.

Some objected to the removal of staple funds in favor of the recently launched “iShares Core” alternatives; they also have capital-gains tax concerns regarding trading out of previously held positions into the new alternatives; and, finally, there’s the inclusion of penalties for short-term trading.

While these aren’t trivial concerns, the new commission-free program is still a dramatic improvement over the previous offering from Fidelity. And it’s clear that after Schwab announced the expansion of commission-free ETF trading on its platform early this year, Fidelity had no choice but to follow suit.

The majority of the pushback appears to be over the replacement of the well-established and frequently traded funds with cheaper, but less popular, alternatives.

Out With The Old, In With The New

The reshuffling took place in two key areas.

U.S. equity ETFs tracking the Russell indexes were removed and replaced by S&P tracking funds covering similar segments of the market. International equity stalwarts such as the (NYSEArca: EEM), (NYSEArca: EFA) and (NYSEArca: ACWX) were replaced by the “Core” fund counterparts (NYSEArca: IEMG), (NYSEArca: IEFA) and (NYSEArca: IXUS).

For new ETF investors on the Fidelity platform, the trade-off is straightforward. While the new commission-free options are undoubtedly less liquid, the lower expenses of these funds should offset the trading challenges.

That said, investors with existing positions have a tougher decision. The switch to the new commission-free options during the selling grace period that’s in effect until July 31, 2013 could result in realizing significant capital gains. On the flip side, investors with unrealized losses can switch into cheaper funds and book losses to offset future gains.

The swap of the old for the new suggests both Fidelity and iShares want to encourage long-term investing through the new product suite, while still benefiting from the revenues generated from higher management fees for iShares and trading commissions for the high-trading turnover funds for Fidelity.

The $7.95 penalty for selling positions—within 30 days for individual investors and within 60 days for advisors—aligns with this line of thinking. The commission-free platform aims to capture sticky assets while discouraging frequent trading. From a long-term asset allocation perspective, this actually encourages prudency.

Countering these drawbacks is a more robust tool kit for investors to make both strategic and tactical bets without incurring commissions.

On the equity side, more country- and region-specific funds joined the broader exposure options previously available. Also included were theme equity funds targeting minimum volatility—(NYSEArca: USMV), (NYSEArca: EFAV) and (NYSEArca: EEMV)—and funds focused on commodity producers in specific sectors—(NYSEArca: RING), (NYSEArca: PICK), (NYSEArca: SLVP) and (NYSEArca: VEGI).

The fixed-income ETF options also dramatically increased: from five to 25 options.

Considering the paltry yields in most corners of the fixed-income markets, avoiding commissions for investors looking to reduce interest rate risk by going into funds like (NYSEArca: FLOT), (NYSEArca: ISTB) or (NYSEArca: SHY) will definitely help a lot. Adding four new international fund options also allows more flexibility for adding greater diversification to traditionally U.S.-centric bond portfolios.

With just a week since the launching of the expanded commission-free trading program, there’s still a chance Fidelity may cave to pressure and change its stance on penalties and exclusion of previously included funds.

However, even if it doesn’t, the new options give investors on the Fidelity platform more, and often better, choices to pick from going forward.


At the time this article was written, the author held no positions in the securities mentioned. Contact Gene Koyfman at gkoyfman@indexuniverse.com.

 

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