BlackRock, the owner of the world's biggest ETF company,
iShares, agreed to help Fidelity Investments' in its
much-anticipated efforts to become a much bigger player in the
fast-growing world of index exchange-traded funds.
Also, Fidelity is more than doubling to 65 funds the number of
it offers commission free to individuals and advisors on its
trading platform, and Boston-based Fidelity also revealed plans to
create new ETF portfolio strategies that will use iShares funds
within its managed account offering, the two companies said today
in a press release.
"As part of Fidelity's growing sector-based business strategy,
the company has established a strategic relationship with BlackRock
whereby the firm will help support Fidelity's future passive sector
investment management efforts," Fidelity said in the press release.
The partnership will focus on sector indexing and broad index
strategies, a Fidelity official said.
Together, the three initiatives suggest that Fidelity aims to
make up for its light footprint in the world of ETFs in a
thoughtful and dramatic way. Making common cause with iShares,
which manages 41 percent of the record $1.460 trillion now invested
in ETFs, suggests Fidelity aims to stay at the forefront of
investors' imaginations, even if it currently manages but one ETF
with $205 million in assets.
"We are thrilled to be joining with Fidelity to create an ETF
manufacturing and distribution powerhouse," Mark Wiedman, global
head of iShares at BlackRock, said in the prepared statement.
Wiedman's singling out marketing may betray something very
important about the partnership.
Some ETF industry sources see in the pairing the next phase of
ETF industry development-namely marketing and distribution-coming
into sharp focus.
"The new era is all about distribution and crossing the last 10
yards of the run to reach the true retail investor-both
individually and via 401(k)s)," said John Hyland, chief investment
officer of United States Commodity Funds, an Oakland, Calif.-based
purveyor of futures-based ETFs.
"For that to happen in a cost-efficient manner, firms like
Schwab and Fidelity need to be involved. I think today's news
reinforces my point," Hyland added.
Officials from BlackRock weren't immediately available to
elaborate, while a Fidelity executive said the new partnership
marked an expansion of a relationship that began three years ago
with the initial launch of commission-free trading of 25 iShares
'This is a great partnership that brings together leaders that
have complementary strengths,' Ram Subramaniam, head of brokerage
and cash management products at Fidelity, told
Making Up For Lost Time
That failure to launch additional ETFs has created the
impression that Fidelity, over time, could be in danger of becoming
irrelevant as investors gravitate to ETFs that are cheaper and more
tax efficient than the open-end mutual funds on which Fidelity
built its reputation.
That said, Fidelity still manages in excess of $1.6 trillion
and, without question, still occupies a bigger place in the public
imagination and has more formidable marketing capacities than does
iShares or even BlackRock. Moreover, Fidelity remains the biggest
administrator of 401(k) retirement plans, a realm said to be the
next frontier of ETF development.
Fidelity's ongoing brand resonance, its marketing muscle and its
big footprint in the world of 401(k)s likely go a long way toward
explaining why BlackRock would even want to help Fidelity develop
The two companies may need each other equally, particularly when
one considers the competitive pressures any ETF sponsor faces these
days from cheap providers such as Vanguard and Charles Schwab.
"It seems Fidelity wants to reach the financial advisory
population, where BlackRock is strong, while BlackRock wants in
with the retail investor, a realm where Fidelity is a household
name," Magoon Capital's Christian Magoon told IndexUniverse.
"The ETF market is still a thin market, so the pie needs to get
bigger. It's getting more difficult for ETF providers to thrive
without preferred access to a broker-dealer system. This deal is
that pie getting bigger," noted Magoon, who previously headed the
ETF firm Claymore Securities before it was acquired by Guggenheim
Preparing Fidelity's ETF Launchpad
While the idea of BlackRock helping Fidelity's efforts to market
ETFs certainly comes as a surprise, it's been widely rumored that
the company that was led through its heyday by Edward C. "Ned"
Johnson III would show its hand as a player in the ETF industry
sometime in 2013.
After all, in December 2011, the company filed for permission
from the Securities and Exchange Commission to market a wide range
of ETFs, and fund industry sources as well as Fidelity spokeswoman
Sophie Launay said the move should be interpreted as a sign that
when Fidelity made its move, it was likely to be a grand
A year later, the company submitted equally wide-reaching
paperwork with the SEC, this time asking for permission to market
actively managed ETFs, and again eliciting response from the fund
industry that Fidelity was indeed cooking up something big.
Both "exemptive relief" filings contemplated the use of "feeder
fund" structures, a detail that prompted some to wonder whether
Fidelity might be moving toward a Vanguard-like structure, wherein
the company's ETFs might end up being a separate share class of
existing open-end mutual funds.
All throughout, the scuttlebutt has been that Fidelity might
seek a competitive edge by emphasizing a sector-based approach to
the ETF market, and the language in today's press release
enumerating "Fidelity's growing sector-based business strategy"
seems to lend credence to that industry talk.
Keeping Up With The Schwabs
In many ways, San Francisco-based Schwab is the most appropriate
competitor any player in the ETF industry should take careful
measure of. It has a successful lineup of ETFs, has a vast online
brokerage and has marketing muscle that definitely holds a candle
The company has demonstrated its own dramatic flair in recent
months, beginning with a splashy gesture of price-cutting that made
its growing lineup of core-exposure ETFs the cheapest in their
respective classes. Never mind that many in the industry suspect
the funds are currently money losers at those low prices. Schwab
wants bragging rights, and bragging rights it has, for now.
Since then, the company announced it was adding ETFs from five
outside sponsors to its commission-free ETF program that had been
limited to Schwab's own lineup of ETFs, and-what do you
know?-iShares isn't among those who agreed to be part of the
"Schwab ETF OneSource" program.
'We're glad to see others following our lead to give investors
more low-cost options,' a Schwab official said of the deal. 'They
are the ultimate winners.'
While Schwab has clearly made waves in leading the charge in the
ETF industry's so-called fee war, all that has happened so far may
pale in comparison to the announcement Schwab has been promising to
make for the past two years. That's the addition of ETFs to its
401(k) platform, something it says will bring big saving to 401(k)
plan participants who often have no clue how much they are
Fidelity and iShares first joined forces in February 2010 with
the launch of a commission-free ETF trading program under which
Fidelity clients could trade 25 iShares ETFs free of charge. A year
later they expanded that program to include 30 iShares ETFs.
That Fidelity-iShares program, which today expanded to 65
iShares ETFs, followed by less than two months the launch of
Schwab's first proprietary ETFs, which itself was accompanied by an
offer for Schwab clients to trade the new funds without trading
Among the ETFs added today to the Fidelity commission-free
program are the 10 "Core" funds iShares unveiled in October that
are among the cheapest available. Fidelity said the entire list is
available on its website at Fidelity.com/etfvalue.
Schwab and Fidelity unleashed a commission-free trend that
pulled in Vanguard as well as other online brokers, such as TD
Ameritrade, Etrade and Interactive Brokers.
(Additional reporting by Cinthia Murphy)
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