Fidelity and BlackRock announced last week a new partnership
that, among other things, will include an expansion of Fidelity's
offering of commission-free trading for iShares
from 30 to 65 funds. It seems to me it's a good move, even if some
The new program, which includes 14 of the original funds and 51
new options, didn't sit well with many advisors, whose concerns
fell into three categories.
Some objected to the removal of staple funds in favor of the
recently launched "iShares Core" alternatives; they also have
capital-gains tax concerns regarding trading out of previously held
positions into the new alternatives; and, finally, there's the
inclusion of penalties for short-term trading.
While these aren't trivial concerns, the new commission-free
program is still a dramatic improvement over the previous offering
from Fidelity. And it's clear that after Schwab announced the
expansion of commission-free ETF trading on its platform early this
year, Fidelity had no choice but to follow suit.
The majority of the pushback appears to be over the replacement
of the well-established and frequently traded funds with cheaper,
but less popular, alternatives.
Out With The Old, In With The New
The reshuffling took place in two key areas.
U.S. equity ETFs tracking the Russell indexes were removed and
replaced by S&P tracking funds covering similar segments of the
market. International equity stalwarts such as the (NYSEArca:EEM),
(NYSEArca:EFA) and (NYSEArca:ACWX) were replaced by the "Core" fund
counterparts (NYSEArca:IEMG), (NYSEArca:IEFA) and
For new ETF investors on the Fidelity platform, the trade-off is
straightforward. While the new commission-free options are
undoubtedly less liquid, the lower expenses of these funds should
offset the trading challenges.
That said, investors with existing positions have a tougher
decision. The switch to the new commission-free options during the
selling grace period that's in effect until July 31, 2013 could
result in realizing significant capital gains. On the flip side,
investors with unrealized losses can switch into cheaper funds and
book losses to offset future gains.
The swap of the old for the new suggests both Fidelity and
iShares want to encourage long-term investing through the new
product suite, while still benefiting from the revenues generated
from higher management fees for iShares and trading commissions for
the high-trading turnover funds for Fidelity.
The $7.95 penalty for selling positions-within 30 days for
individual investors and within 60 days for advisors-aligns with
this line of thinking. The commission-free platform aims to capture
sticky assets while discouraging frequent trading. From a long-term
asset allocation perspective, this actually encourages
Countering these drawbacks is a more robust tool kit for
investors to make both strategic and tactical bets without
On the equity side, more country- and region-specific funds
joined the broader exposure options previously available. Also
included were theme equity funds targeting minimum
volatility-(NYSEArca:USMV), (NYSEArca:EFAV) and (NYSEArca:EEMV)-and
funds focused on commodity producers in specific
sectors-(NYSEArca:RING), (NYSEArca:PICK), (NYSEArca:SLVP) and
The fixed-income ETF options also dramatically increased:from
five to 25 options.
Considering the paltry yields in most corners of the
fixed-income markets, avoiding commissions for investors looking to
reduce interest rate risk by going into funds like (NYSEArca:FLOT),
(NYSEArca:ISTB) or (NYSEArca:SHY) will definitely help a lot.
Adding four new international fund options also allows more
flexibility for adding greater diversification to traditionally
U.S.-centric bond portfolios.
With just a week since the launching of the expanded
commission-free trading program, there's still a chance Fidelity
may cave to pressure and change its stance on penalties and
exclusion of previously included funds.
However, even if it doesn't, the new options give investors on
the Fidelity platform more, and often better, choices to pick from
At the time this article was written, the author held no
positions in the securities mentioned. Contact Gene Koyfman at
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