Wary Of Fidelity & BlackRock ETF Platform

March 27, 2013

The Fidelity and BlackRock alliance is certainly interesting, but there are issues that concern me as an investor interested in suitability and stability.

Last week, my colleague Gene Koyfman wrote about Fidelity and BlackRock’s new trading partnership. He loved the idea. I think he’s a little glossy-eyed; the plan has some significant flaws.

For those who don’t know the details, I’ll sum it up for you. Fidelity and BlackRock announced a new partnership last week that led to the expansion from 30 to 65 of commission-free iShares ETFs on Fidelity’s platform. However, the new partnership also eliminated traditional iShares funds such as (NYSEArca: EEM), (NYSEArca: EFA) and (NYSEArca: ACWX), which were replaced by the “Core” funds (NYSEArca: IEMG), (NYSEArca: IEFA) and (NYSEArca: IXUS).

Along with that, the new partnership established a $7.95 penalty for selling positions within 30 days for individual investors, and 60 days for advisors. Some, like my colleague Gene, have trumpeted these changes as beneficial to investors; however, there are some issues to consider.

For one, the elimination of EEM from the commission-free lineup assumes that EEM is an inferior fund. I disagree. Although IEMG is a fraction of the cost of EEM, EEM is still a valid option for those who want exposure to the emerging markets via MSCI standards. The same can be said for EFA as well.

We often champion broad exposure here at IndexUniverse. However, there are still advisors and individual investors who favor the large- and midcap emphasis of EEM over the additional small-cap exposure that IEMG provides.

Also, let’s not forget that many institutions are benchmarked to the version of the MSCI Emerging Markets Index that EEM tracks, not the MSCI Emerging Markets Investable Markets Index that IEMG tracks.

And let’s be honest, if BlackRock truly wanted to help long-term investors, it would have helped those who bought EEM early on by simply lowering the expense ratio and modifying the exposure. However, BlackRock made the (smart) business decision to instead create a new line of funds that didn’t do much to help old investors, but surely attracted a new group of investors.

 

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