Last week, my colleague Gene Koyfman wrote about Fidelity and BlackRock’s new trading partnership . He loved the idea. I think he’s a little glossy-eyed; the plan has some significant flaws.
For those who don’t know the details, I’ll sum it up for you. Fidelity and BlackRock announced a new partnership last week that led to the expansion from 30 to 65 of commission-free iShares ETFs on Fidelity’s platform. However, the new partnership also eliminated traditional iShares funds such as (EEM), (EFA) and (ACWX), which were replaced by the “Core” funds (IEMG), (IEFA) and (IXUS).
Along with that, the new partnership established a $7.95 penalty for selling positions within 30 days for individual investors, and 60 days for advisors. Some, like my colleague Gene, have trumpeted these changes as beneficial to investors; however, there are some issues to consider.
For one, the elimination of EEM from the commission-free lineup assumes that EEM is an inferior fund. I disagree. Although IEMG is a fraction of the cost of EEM, EEM is still a valid option for those who want exposure to the emerging markets via MSCI standards. The same can be said for EFA as well.
We often champion broad exposure here at IndexUniverse. However, there are still advisors and individual investors who favor the large- and midcap emphasis of EEM over the additional small-cap exposure that IEMG provides.
Also, let’s not forget that many institutions are benchmarked to the version of the MSCI Emerging Markets Index that EEM tracks, not the MSCI Emerging Markets Investable Markets Index that IEMG tracks.
And let’s be honest, if BlackRock truly wanted to help long-term investors, it would have helped those who bought EEM early on by simply lowering the expense ratio and modifying the exposure. However, BlackRock made the (smart) business decision to instead create a new line of funds that didn’t do much to help old investors, but surely attracted a new group of investors.
This brings to mind my second concern with the partnership:program stability. The fact that BlackRock and Fidelity are now offering 65 funds is great, but there’s nothing to say that those offerings will be consistently upheld. Already we’ve seen changes with EEM and EFA being thrown out despite their popularity.
The fee structure of such programs also lends to a lack of predictability. Advisors that built portfolios on the Fidelity-BlackRock platform using a tactical strategy are now at a disadvantage with the new fee structure that penalizes those that sell ETFs in less than 60 days.
Advisors have already voiced their concerns, and some are now planning to move to other platforms like Charles Schwab’s One Source program, which offers Schwab ETFs and those of select ETF issuers commission free—without the trading penalty.
However, the lack of stability isn’t just an issue with BlackRock and Fidelity. It’s an issue with commission-free programs like Schwab’s as well. Schwab’s program is essentially an agreement between Schwab and other ETF issuers. There’s little debate that if Schwab were to launch an ETF that competed directly with an ETF currently on the OneSource platform from another ETF issuer, the non-Schwab ETF would likely get booted from the program.
This brings us to my biggest point:When ETF issuers get involved with commission-free or trading platforms, there’s an inherent conflict of interest. The result is that investors can’t depend on access to programs that offer the best ETFs with predictable transaction costs. Rather, the best way to ensure fair and proper trading procedures is to do so through independent third-party platforms.
Although the exchanges have treated ETF trading as if it were akin to single-stock trading, there is some hope that ETFs will receive the much-needed attention they deserve with programs such as the new market-maker incentive program that was proposed by NYSE Arca. However, simply relying on ETF issuers to provide platforms is hardly a sustainable approach.
At the time this article was written, the author held no positions in any of the securities mentioned. Contact Ugo Egbunike at firstname.lastname@example.org .
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