Fidelity Shakes Up ETF Game
Fidelity on Tuesday announced it would offer free trades on 25 iShares exchange-traded funds in a partnership with BlackRock(BLK). The move will help the mutual fund giant cultivate a stickier customer base and stay relevant in the exploding age of ETFs.
While I recently noted that a departing Fidelity executive hinted at proprietary funds (Fidelity Hints It May Get Into ETFs), today’s announcement is a major milestone for the Boston behemoth.
The 25 funds are a predictable bunch, including big-name index brands that could be mistaken for mutual funds at first glance. BlackRock acquired iShares in June.
The iShares Russell 1000(IWB) , iShares S&P 500(IVV) and iShares S&P Growth(IVW) will all offer Fidelity traders inexpensive exposure to well-known indices.
Not to be boring, Fidelity will also offer access to other heavily traded ETFs. Also available commission-free will be the iShares MSCI Emerging Markets(EEM), iShares TIPs(TIP) and the iShares iBoxx Investment Grade Corporate Debt(LQD) ETFs.
Too Little, Too Late?
Fidelity’s announcement may be an admission of missed opportunities in the ETF space. Vanguard, a competitor in the mutual fund space, has already transformed the ETF industry with low-cost iShares knock-offs.
While Vanguard’s most popular funds may not be examples of original thinking, they have shattered the mold in an industry where first-mover status is king. The Vanguard Emerging Markets Stock ETF(VWO), which goes head-to-head with iShares’ EEM, raked in $1.2 billion in 2009, according to data from the National Stock Exchange. EEM, which was introduced earlier, netted $941 million.
The first lesson Fidelity must learn is that ETF investors are a discerning bunch. If they are presented with an identical product at a lower price point, they know how to bargain-hunt.
Fidelity’s deal with BlackRock is limited in more ways than one. Customers are limited to 25 commission-free funds, while Fidelity hesitates to take the most important step: the introduction of proprietary funds.
The ETF industry is still in its adolescence, and there is plenty of room for a firm like Fidelity to make an impact. Schwab introduced commission-free funds for customers in 2009, and Pimco recently entered the ETF marketplace on the fixed-income side.
The most successful ETF issuers are able to step back and see where they can make an impact. Fidelity’s reputation, loyal customer base, and dominance in the 401(k) space are a force to be reckoned with.
ETF investors, many of whom abandoned the sea of mutual funds for more transparent waters, have been slow to accept the type of actively managed ETFs that Rodger Lawson hinted at on his way out. Fidelity would be best served developing its own line of sector funds, based on its line of “Fidelity Select” mutual funds.
Fidelity may be late in joining the ETF game, but the firm could easily become a major player. Fidelity must move quickly and efficiently, coloring offerings with the firm’s identity.
