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BlackRock, Fidelity Launch ETF Partnership
3/13/2013 1:46:00 PM
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 iShares ETFs 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 ETFs.
'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 IndexUniverse.com.
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 ETFs.
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 Partners.
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 gesture.
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 to Fidelity's.
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 paying.
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 commissions.
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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