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Fidelity, iShares Expand ETF Partnership: What Does it Mean?


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 (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 (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 (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.”

There has been lingering speculation that Fidelity might launch a family of actively managed ETFs based on its stable of sector mutual funds since the firm hired State Street ETF veteran Tony Rochte. That speculation could be misplaced. [Fidelity Files to Launch Active ETFs]

Fidelity said Wednesday it will partner with BlackRock “to offer some passively managed ETF sector funds like in health care and technology, although it hasn’t offered any further details,” The Wall Street Journal reported.

Kathleen Murphy, president of personal investing at Fidelity Investments, told Ignites.com the firm entered into a commitment with BlackRock for product development and innovation on an on-going basis. “Fidelity will focus its efforts on actively managed ETFs, smart beta ETFs and will partner with iShares on passive ETF sector funds,” she said in the report.

3. Fidelity shying away from ‘me-too’ index ETFs

Fidelity currently manages one ETF, Fidelity Nasdaq Composite Index (ONEQ).

Based on Wednesday’s announcement and press reports, it seems that Fidelity is holding off on launching more of its own broad-based indexed ETFs. Instead, it will offer iShares ETFs to its customers who want to invest in these diversified, passively managed ETFs.

Fidelity’s Murphy told The Wall Street Journal that clients would be better served by having expanded access to the country’s largest provider of ETFs—BlackRock—than by Fidelity trying to create its own funds from scratch.

“Instead of being a ‘me-too’ in the passive ETF space, we’re going to partner with the leader,” Murphy said in a WSJ.com report.

It appears that Fidelity will focus on launching its own actively managed ETFs, based on regulatory filings.

4. ETFs in managed accounts

The announcement Wednesday also includes a partnership under which Fidelity will expand its managed account offerings with new products using iShares ETFs as the underlying investments.

“Fidelity and BlackRock will jointly focus on providing innovative ETF-based solutions on an ongoing basis as part of this partnership,” the firms said in a press release.

“We’re broadening our managed account suite of tactical ETF strategies,” Murphy said in a telephone interview Wednesday. “This is a down payment on the long-term alliance with BlackRock’s iShares.”

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.