The exchange traded fund (ETF) price war has a new combatant: Fidelity. On the heels of Charles Schwab’s lead, the mutual fund provider has slashed what it costs to buy stocks and ETFs through its online brokerage platform.

Fidelity has lowered its commission to $7.95 on trades through its site. And if you opt to trade certain iShares ETFs, commissions are completely free. The 25 iShares funds offered up for commission-free trading cover a range of major indexes and asset classes, including:

• iShares MSCI Emerging Markets (NYSEArca: EEM)
• iShares MSCI EAFE Index Fund (NYSEArca: EFA)
• iShares Barclays Aggregate Bond Fund (NYSEArca: AGG)
• iShares Russell 2000 Index Fund (NYSEArca: IWM)

For a full list of the free ETFs, click here.

Paul Justice at Morningstar says that Fidelity likely selected the iShares ETFs it did because they’re important to building strong core portfolios and tend not to be heavily traded by smaller investors. The hope is that Fidelity will lure investors looking for free iShares trades and then keep them around to trade other products.

The new, lowered commission will slash trading costs for Fidelity’s smaller customers by 60%. Commissions had been as high as $19.95. Here’s the catch: to take advantage of the savings, customers must trade at Fidelity.com and have at least $2,500 in taxable accounts. The partnership could be a strongly competitive alliance: iShares holds 50% of the ETF market share.

Fidelity’s lower prices are just the latest in the ETF price wars. When Schwab unveiled its new ETFs, it announced that all its proprietary funds would be commission free when traded at Schwab. The brokerage also lowered commissions for all trades to $8.95. [Schwab's ETFs opening doors.]

Other brokerages are also offering appealing deals. TD Ameritrade charges $9.99 a trade, E*Trade charges $12.99 to customers with less than $5,000 in assets. [How low can fees go?]

Fidelity’s announcement could be a harbinger of what’s to come: there’s going to be a race with the big discount brokers to offer competitive pricing because ETFs are no longer small fry. In fact, ETF trading now accounts for 50% of all trading on exchanges.

Brokerages are in heated competition for ETF assets from both advisors and individual investors.

We’re getting ever closer to having discount brokerages offer “ETF supermarkets,” where you’ll eventually be able to trade a majority of ETF commission-free.

Tags: AGG, Asset Class ETFs, Bond ETFs, EEM, EFA, Emerging Markets, Global ETFs, IWM, Small-Cap