Fidelity Investments, the Boston-based brokerage firm, has added five new iShares funds to its lineup of ETFs that its customers can trade without paying a commission, bringing to 30 the number of ETFs in its free-trading program.
Fidelity, which offers just one ETF of its own, the Fidelity Nasdaq Composite Index Tracking Stock (NasdaqGM: ONEQ), struck a deal with iShares’ parent BlackRock last year to begin offering commission-free trades on 25 iShares funds. The addition of the new ETFs marks the one-year anniversary of that agreement, Fidelity said in a press release.
The practice of offering commission-free ETF trading—a marketing technique designed to make ETFs more palatable to individual investors—has been gaining traction in the brokerage space in recent years. Wells Fargo began offering a limited number of free ETF trades to large account holders in 2005. Last year, TD Ameritrade and Vanguard added commission-free trading programs, following a move by Schwab late in 2009.
While Fidelity's program has been popular with its customers—it said its commission-free ETFs attracted investor cash at three times the rate of funds outside the program—its rival brokerages offer more comprehensive programs. TDAmeritrade, for instance, allows investors to purchase more than 100 ETFs from a range of fund sponsors commission-free. Vanguard offers its brokerage clients commission-free trades on its entire lineup of ETFs.
The iShares ETFs that Fidelity added to its free-trading program are:
- iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca: HYG)
- iShares Dow Jones Select Dividend Index Fund (NYSEArca: DVY)
- iShares Dow Jones International Select Dividend Fund (NYSEArca: IDV)
- iShares Dow Jones U.S. Real Estate Index Fund (IYR)
- iShares MSCI ACWI ex-US Index Fund (ACWX)
HYG and IDV carry expense ratios of 0.50 percent of assets under management, while DVY charges 0.40 percent and IYR costs 0.47 percent. ACWX, at 0.35 percent, is the least expensive new fund.
No Free Lunch
While the promise of commission-free trading may be appealing to retail investors, Index Universe's Dave Nadig pointed out in a blog last year following the announcement of Vanguard’s free-trading program that the cost of executing a so-called free ETF trade may be borne indirectly by the fund's shareholders.
"iShares is writing a check to Fidelity to cover the cost of commissions, in exchange for having a commission-free presence on Fidelity's website," Nadig wrote. If increased assets under management fail to make up for the cost of commissions, then shareholders may be on the hook.
"The enterprise will demand profits from somewhere, theoretically putting upward pressure on expense ratios."