Fidelity Follows The Green Line Into ETFs With BlackRock
Every so often, an ETF-related story hits the news wires that is legitimately intriguing, and this week’s announcement of an expanded partnership between Fidelity and BlackRock certainly fits the bill. Fidelity announced that it was increasing its relationship with BlackRock in a number of ways.
The first announcement, which should have the most immediate implications, was that Fidelity was more than doubling the coverage of iShares ETFs eligible for free trading on its platform. The previous tally of 30 commission-free ETFs had been trumped first by TD Ameritrade, then by Schwab. The new total, while still modest, now comes in at 65 funds.
The expanded coverage of commission-free ETFs gives self-directed investors a much wider range of choices that covers the bulk of what most individual investors would consider buying anyway.
Perhaps the biggest get for Fidelity was the new slate of “core” ETFs from iShares that charge lower fees than the traditional line of BlackRock products. This combination of low-fee products and zero commissions makes Fidelity the de facto destination for cost-conscious, self-directed investors.
Beyond the self-directed crowd lies the advisor trying to find ways to add value to an increasingly intelligent investor base with a keen understanding of the benefits of indexing. After all, why would clients pay an advisor 1.5 percent, let alone a nickel, when they can get comprehensive asset exposure at little to no cost? The answer seems to be the managed portfolio solutions wrapper, another key component of the expanded Fidelity-BlackRock alliance.
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In addition to upping its offering of commission-free ETFs, Fidelity announced the integration of iShares ETFs into its portfolio advisory solutions. These strategies, which dynamically adjust asset allocation models to fit the needs and profiles of different investors, will use iShares ETF to fulfill their mandates.
These portfolio solutions allow Fidelity to add value to those individual investors who would otherwise be able to merely Google “modern portfolio theory” and engineer an asset allocation model that suits their needs. In that way, they are competing with firms like Palo Alto, Calif.-based Wealthfront that provides portfolio solutions, complete with tax-loss harvesting strategies, all at a dirt-cheap price of 25 basis points, or for each ,000 invested—with the first ,000 managed free of charge.
As if that weren’t enough, Fidelity also announced a strategic partnership with iShares in the development of Fidelity’s own suite of passive ETF strategies, including broad beta strategies as well as sector funds.
It’s no secret that Fidelity has been flirting with the idea of launching ETFs in recent years, even if it already has an existing ETF on the market, its largely overlooked Fidelity Nasdaq Composite Tracking Stock ETF (ONEQ). Back in December 2011, Fidelity filed for the right to launch a wide range of passive ETF strategies, and submitted new paperwork a year later detailing plans for active funds.
Until this week’s press release, there was little fire to that smoke. That may have changed, but it remains to be seen in what way. All we know is that both of the firm’s exemptive relief filings included language about a “feeder fund” structure that has the look and feel of Vanguard’s patented fund structure.
On the surface, it seems Fidelity is angling to use the ETF wrapper as a way to pool assets from its existing mutual funds to expand the reach of those products. What we don’t know is where the iShares alliance will fit in this particular arena. After all, it would seem that the launch of passive ETF products from Fidelity would compete head-on with many of the core products that form the bulk of BlackRock’s asset base.
It seems that while some of the moves seem relatively straightforward—the expansion of commission-free ETFs and the integration of iShares products into managed portfolio solutions—there are still more questions than answers. What types of passive products will Fidelity launch? Will they use the “feeder fund” structure”? What role will BlackRock play in those launches? Finally, where does this leave all of those filings for actively managed ETF products?
Based on Fidelity’s feedback, actively managed and so-called smart-beta strategies will be done in-house, but it remains to be seen when that will happen and what shape they will take. While those questions are still left very much unanswered, the clear takeaway is that the ETF revolution will be televised.