BlackRock, Fidelity Launch ETF Partnership

March 13, 2013

Fidelity’s ambitious ETF plans begin to take shape, and it’s combining with BlackRock to help bring some of those plans to fruition.

 

BlackRock, the owner of the world’s biggest ETF company, iShares, agreed to help Fidelity Investments’ in its much-anticipated efforts to become a far bigger player in the fast-growing world of index exchange-traded funds.

Also, Fidelity is more than doubling to 65 funds the number of iShares ETFs it offers commission free to individuals and advisors on its trading platform, and Boston-based Fidelity also revealed plans to create new ETF portfolio strategies that will use iShares funds within its managed account offering, the two companies said today in a press release.

“As part of Fidelity’s growing sector-based business strategy, the company has established a strategic relationship with BlackRock whereby the firm will help support Fidelity’s future passive sector investment management efforts,” Fidelity said in the press release. The partnership will focus on sector indexing and broad index strategies, a Fidelity official said.

Together, the three initiatives suggest that Fidelity aims to make up for its light footprint in the world of ETFs in a thoughtful and dramatic way. Making common cause with iShares, which manages 41 percent of the record $1.460 trillion now invested in ETFs, suggests Fidelity aims to stay at the forefront of investors’ imaginations, even if it currently manages but one ETF with $205 million in assets.

“We are thrilled to be joining with Fidelity to create an ETF manufacturing and distribution powerhouse,” Mark Wiedman, global head of iShares at BlackRock, said in the prepared statement. Wiedman’s singling out marketing may betray something very important about the partnership.

Some ETF industry sources see in the pairing the next phase of ETF industry development—namely marketing and distribution—coming into sharp focus.

“The new era is all about distribution and crossing the last 10 yards of the run to reach the true retail investor—both individually and via 401(k)s),” said John Hyland, chief investment officer of United States Commodity Funds, an Oakland, Calif.-based purveyor of futures-based ETFs.

“For that to happen in a cost-efficient manner, firms like Schwab and Fidelity need to be involved. I think today's news reinforces my point,” Hyland added.

Officials from BlackRock weren’t immediately available to elaborate, while a Fidelity executive said the new partnership marked an expansion of a relationship that began three years ago with the initial launch of commission-free trading of 25 iShares ETFs.

"This is a great partnership that brings together leaders that have complementary strengths," Ram Subramaniam, head of brokerage and cash management products at Fidelity, told IndexUniverse.com.

Making Up For Lost Time

While the Fidelity Nasdaq Composite Tracking Stock Index ETF (NYSEArca: ONEQ) came to market about 10 years ago—hardly “late” to the ETF party—the company whose mutual funds, such as Magellan, became household names in the 1980s and 1990s hasn’t brought any ETFs to market since ONEQ.

That failure to launch additional ETFs has created the impression that Fidelity, over time, could be in danger of becoming irrelevant as investors gravitate to ETFs that are cheaper and more tax efficient than the open-end mutual funds on which Fidelity built its reputation.

That said, Fidelity still manages in excess of $1.6 trillion and, without question, still occupies a bigger place in the public imagination and has more formidable marketing capacities than does iShares or even BlackRock. Moreover, Fidelity remains the biggest administrator of 401(k) retirement plans, a realm said to be the next frontier of ETF development.

Fidelity’s ongoing brand resonance, its marketing muscle and its big footprint in the world of 401(k)s likely go a long way toward explaining why BlackRock would even want to help Fidelity develop ETFs.

The two companies may need each other equally, particularly when one considers the competitive pressures any ETF sponsor faces these days from cheap providers such as Vanguard and Charles Schwab.

“It seems Fidelity wants to reach the financial advisory population, where BlackRock is strong, while BlackRock wants in with the retail investor, a realm where Fidelity is a household name,” Magoon Capital's Christian Magoon told IndexUniverse.

“The ETF market is still a thin market, so the pie needs to get bigger. It’s getting more difficult for ETF providers to thrive without preferred access to a broker-dealer system. This deal is that pie getting bigger,” noted Magoon, who previously headed the ETF firm Claymore Securities before it was acquired by Guggenheim Partners.

 

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