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
on Fidelity's platform. However, the new partnership also
eliminated traditional iShares funds such as (NYSEArca:EEM),
(NYSEArca:EFA) and (NYSEArca:ACWX), which were replaced by the
"Core" funds (NYSEArca:IEMG), (NYSEArca:IEFA) and
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
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
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
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
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