Fidelity Offers iShares ETFs Commission-Free

Fidelity announced today that it will be offering a suite of 25 iShares ETFs commission-free. In our view, the 25 ETFs selected (see the full list below) are among the most relevant product offerings from the largest ETF provider and will allow investors to build high-quality, transparent, liquid, and tax-efficient portfolios without the single-largest cost burden they previously faced when comparing ETFs to indexed mutual funds--trading commissions.

Partnering with ETF industry behemoth iShares, which holds a 50% market share of ETF assets, is a well calculated competitive response to the commission-free ETF offering from Charles Schwab announced last November. We are still big fans of Schwab's move, but Fidelity's partnership brings the competition to a new level.

Chuck's offering of eight ETFs, which the firm manages, have collected roughly $550 million in total assets since their recent launches. In contrast, the 25 iShares products have collected over $212 billion in assets, and no single iShares offering on the list has attracted less than $765 million in assets. This gives Fidelity's lineup of iShares funds much greater liquidity, which should lead to greater trade execution and a better investor experience. Additionally, having more assets under management typically leads to lower fees because of the product scalability, so even retail investors should reap the rewards of institutional-level pricing on these funds. Furthermore, the diversity of the product offering provides an abundance of choice and value to ETF investors utilizing the Fidelity trading platform.

We are already big fans of the iShares products that Fidelity will be featuring commission-free: In our ETFInvestor newsletter's Hands Free portfolio, five out the 11 funds we own are on this list. (See the full list below.) Having the ability to purchase these funds commission-free would simply allow us to add to these positions without paying the price of admission. This is particularly relevant to investors who make frequent contributions to their portfolios.

So What's in It for Fidelity?
When Schwab made its own ETFs commission-free, its motivation was more obvious. Since the firm issued the ETFs, it was able to capture the management fee for itself instead of letting the other providers reap the rewards. In Fidelity's case, it may appear that iShares is the true beneficiary. After all, if ETFs are commission-free, sport tax advantages over traditional mutual funds, and offer institutional pricing, what is Fidelity's motivation?

One could speculate that iShares is providing Fidelity with an explicit commission kick-back, but that is not the case. The only relevant compensation between the two is a joint marketing agreement. We view this as a win-win for the two firms, since both are among the largest and most relevant players in their intertwined and complementary industries.

Fidelity most likely selected this lineup of funds because they are extremely relevant to building core portfolios, but they are also not the funds that are most frequently traded by individual investors. These are, for the most part, buy-and-hold funds that asset allocators covet. Fidelity likely wouldn't make a killing on the commissions from these products anyway. Instead, they attract cost-conscious investors to their platform, allow them to park a majority of their assets in these quality offerings, and hope that the same investors generate commissions for Fidelity when trading other products.

In conjunction with the iShares partnership announcement, Fidelity has also set a level ETF trading commission for all investors using an Internet platform at $7.95, which makes Fidelity a competitive low-cost platform for trading any ETF (the rate also applies for most U.S.-listed equities). So if investors choose to use Fidelity's platform for both their "core" and "explore" portfolios using ETFs, it looks like investors will still be getting a great bargain.

iShares ETFs to Be Offered Commission Free on Fidelity's Platform

  Ticker Category Net Assets ($Mil) Expense Ratio* iShares MSCI ACWI Index ACWI World Stock 795 0.35 iShares Barclays Agg Bond AGG Intermed Bond 11,287 0.20 iShares MSCI Em Mkts Index EEM Div Emg Mkts 35,896 0.72 iShares MSCI EAFE Index EFA Foreign Lg Blend 33,712 0.35 iShares JPMorgan USD Em Mkts Bond EMB Emg Mkts Bond 1,221 0.60 iShares S&P MidCap 400 Index IJH Mid-Blend 6,491 0.20 iShares S&P MidCap 400 Value Index IJJ Mid-Value 1,868 0.25 iShares S&P MidCap 400 Growth Index IJK Mid-Growth 1,879 0.25 iShares S&P SmallCap 600 Index IJR Small Blend 5,212 0.20 iShares S&P SmallCap 600 Value Index IJS Small Value 1,519 0.25 iShares S&P SmallCap 600 Growth IJT Small Growth 1,438 0.25 iShares S&P 500 Value Index IVE Large Value 3,682 0.18 iShares S&P 500 Index IVV Large Blend 21,142 0.09 iShares S&P 500 Growth Index IVW Large Growth 5,470 0.18 iShares Russell 1000 Index IWB Large Blend 4,969 0.15 iShares Russell 1000 Value Index IWD Large Value 8,611 0.20 iShares Russell 1000 Growth Index IWF Large Growth 10,755 0.20 iShares Russell 2000 Index IWM Small Blend 11,922 0.20 iShares Russell 2000 Value Index IWN Small Value 3,426 0.25 iShares Russell 2000 Growth Index IWO Small Growth 3,082 0.25 iShares Russell 3000 Index IWV Large Blend 2,864 0.20 iShares iBoxx $ Inv Grade Corp Bond LQD Long-Term Bond 12,525 0.15 iShares S&P Natl AMT-Free Muni Bd MUB Muni Nat'l Long 1,632 0.25 iShares MSCI EAFE Small Cap Index SCZ Frgn Sm/Mid Val 765 0.40 iShares Barclays TIPS Bond TIP Infl-Protect Bond 19,936 0.20 * Annual Report Net Expense Ratio
 
 

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