There are a lot of moving parts to the announcement Wednesday that Fidelity Investments and BlackRock’s iShares are deepening their partnership in exchange traded funds, but the move can be boiled down into a few essential points for the ETF business and investors.
The bottom line is that the expanded alliance between Fidelity and iShares is another example of how ETF investors benefit from competition in the maturing industry. ETF managers and online brokers are slashing costs in an effort to attract business, which results in lower fees for investors and financial advisors.
Here are the main takeaways from Wednesday’s announcement from Fidelity and BlackRock (NYSE: BLK) based on our own interviews and press reports:
1. Fidelity adds more commission-free iShares ETFs
Perhaps most importantly, Fidelity is more than doubling the number of iShares ETFs to 65 that Fidelity customers will be able to trade without paying commissions.
On the surface, this appears to be a response to Charles Schwab (NYSE: SCHW) earlier this year unveiling a new platform called Schwab ETF OneSource.
The platform allows Schwab clients to buy and sell 105 ETFs with zero online trade commissions, including ETFs from State Street (NYSE: STT), Guggenheim, Invesco PowerShares, ETF Securities, U.S. Commodity Funds and Schwab’s own lineup of ETFs. BlackRock’s iShares ETFs are notably absent from Schwab ETF OneSource platform.
Much is made of the supposed rivalries between ETF providers, and also among the online brokers that are trying to secure market share in ETF trading. This often gets overblown, in my opinion. In the end, every firm has its own strengths it is trying to emphasize. For example, Wednesday’s announcement seems to highlight Fidelity’s forte in actively managed financial products, and BlackRock’s expertise in index-based, passive ETFs. [Schwab Unveils Commission-Free ETF Platform]
Chuck Jaffe at MarketWatch reports the new Fidelity-iShares agreement effectively extends a three-year-old deal between the firms that was set to expire.
Based on my own research, BlackRock’s iShares couldn’t have joined Schwab’s OneSource ETF platform for commission-free trades, even if BlackRock wanted to, due of its existing and exclusive arrangement with Fidelity. Also, Schwab does not plan on adding any more ETF providers to the platform beyond the initial group of ETF managers, for at least a year. However, my understanding is that existing fund providers on Schwab’s platform can add more ETFs if they choose.
2. Sectors: Active mutual funds, passive ETFs?
Secondly, Fidelity says it has established a strategic relationship with BlackRock to help Fidelity’s “future passive sector investment management efforts,” according to a press release. [Fidelity, BlackRock in ETF Partnership]
Fidelity is a pioneer in actively managed mutual funds that invest in sectors such as energy and healthcare. The firms’ lineup of active sector funds hold assets of over $47 billion.
“While actively managed sector strategies will continue to be a core focus, Fidelity intends to deploy passive sector capabilities as part of its expanding sector-based strategy, and as part of those efforts, Fidelity will work with BlackRock,” Fidelity said in the press release. “Fidelity will continue to develop its active and smart beta investment management capabilities and these efforts will complement the expanded ETF alliance with BlackRock and iShares.”