BlackRock, Fidelity Launch ETF Partnership

March 13, 2013

 

Preparing Fidelity’s ETF Launchpad

While the idea of BlackRock helping Fidelity’s efforts to market ETFs certainly comes as a surprise, it’s been widely rumored that the company that was led through its heyday by Edward C. “Ned” Johnson III would show its hand as a player in the ETF industry sometime in 2013.

After all, in December 2011, the company filed for permission from the Securities and Exchange Commission to market a wide range of ETFs, and fund industry sources as well as Fidelity spokeswoman Sophie Launay said the move should be interpreted as a sign that when Fidelity made its move, it was likely to be a grand gesture.

A year later, the company submitted equally wide-reaching paperwork with the SEC, this time asking for permission to market actively managed ETFs, and again eliciting response from the fund industry that Fidelity was indeed cooking up something big.

Both “exemptive relief” filings contemplated the use of “feeder fund” structures, a detail that prompted some to wonder whether Fidelity might be moving toward a Vanguard-like structure, wherein the company’s ETFs might end up being a separate share class of existing open-end mutual funds.

All throughout, the scuttlebutt has been that Fidelity might seek a competitive edge by emphasizing a sector-based approach to the ETF market, and the language in today’s press release enumerating “Fidelity’s growing sector-based business strategy” seems to lend credence to that industry talk.

It appears Fidelity and BlackRock will collaborate on core index ETFs and on passive sector ETFs, though Fidelity will continue to forge onward alone in the realms of active ETFs and so-called smart beta ETFs that use indexes that screen for various factors, such as volatility or momentum.

Keeping Up With The Schwabs

In many ways, San Francisco-based Schwab is the most appropriate competitor any player in the ETF industry should take careful measure of. It has a successful lineup of ETFs, has a vast online brokerage and has marketing muscle that definitely holds a candle to Fidelity's.

The company has demonstrated its own dramatic flair in recent months, beginning with a splashy gesture of price-cutting that made its growing lineup of core-exposure ETFs the cheapest in their respective classes. Never mind that many in the industry suspect the funds are currently money losers at those low prices. Schwab wants bragging rights, and bragging rights it has, for now.

Since then, the company announced it was adding ETFs from five outside sponsors to its commission-free ETF program that had been limited to Schwab’s own lineup of ETFs, and—what do you know?—iShares isn’t among those who agreed to be part of the “Schwab ETF OneSource” program.

"We're glad to see others following our lead to give investors more low-cost options," a Schwab official said of the deal. "They are the ultimate winners."

While Schwab has clearly made waves in leading the charge in the ETF industry’s so-called fee war, all that has happened so far may pale in comparison to the announcement Schwab has been promising to make for the past two years. That’s the addition of ETFs to its 401(k) platform, something it says will bring big saving to 401(k) plan participants who often have no clue how much they are paying.

Commission-Free ETFs

Fidelity and iShares first joined forces in February 2010 with the launch of a commission-free ETF trading program under which Fidelity clients could trade 25 iShares ETFs free of charge. A year later they expanded that program to include 30 iShares ETFs.

That Fidelity-iShares program, which today expanded to 65 iShares ETFs, followed by less than two months the launch of Schwab’s first proprietary ETFs, which itself was accompanied by an offer for Schwab clients to trade the new funds without trading commissions.

Among the ETFs added today to the Fidelity commission-free program are the 10 “Core” funds iShares unveiled in October that are among the cheapest available. Fidelity said the entire list is available on its website at Fidelity.com/etfvalue.

Schwab and Fidelity unleashed a commission-free trend that pulled in Vanguard as well as other online brokers, such as TD Ameritrade, Etrade and Interactive Brokers.

 

(Additional reporting by Cinthia Murphy)

 

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