Fidelity’s ETF deal is a bet on sector’s growth

By Ross Kerber – Analysis

BOSTON (BestGrowthStock) – When it comes to exchange-traded funds, one of the last big financial industry holdouts is jumping on the bandwagon.

Boston fund power Fidelity Investments outlined plans on Tuesday to waive trading commissions on 25 of the popular iShares ETFs managed by BlackRock Inc, signaling its first major foray into the booming sector.

Fidelity stopped short of offering its own suite of ETFs as some financial advisers expected. Instead, Fidelity will promote BlackRock’s funds while receiving what a BlackRock executive called a “fixed amount” of money from the New York asset manager to cover some of the fee waivers, advertising and technical costs.

Still, the new alliance with BlackRock of New York marks a final acknowledgment of the growth of ETFs and their importance to retail investors, said Paul Justice, an analyst who follows the industry for Morningstar in Chicago.

Although the industry has more than doubled since 2005, to $1 trillion globally by BlackRock’s count, ETFs will continue picking up market share, Justice said. Following Fidelity and BlackRock’s move “you will see a great deal of competitive response,” he added.

The rapid growth of ETFs offered by iShares, State Street Corp and others is in stark contrast with the skepticism investors have shown traditional stock mutual funds, which saw high outflows as stock markets sank.

Fidelity introduced a single ETF of its own in 2003, but never followed up with additional products.

Mark Latham, BlackRock Managing Director and head of its North American iShares business, said the Fidelity deal resembled those it has with about six other companies to promote ETFs, although he declined to name them.

Whereas ETFs once were sold mainly through financial advisers, in recent years iShares has sold a growing proportion directly to consumers through online brokerages, he said. The Fidelity deal, Latham added, gives him more direct path to these investors.

“This is one way to go after a segment that previously I was not able to get at easily,” he said.

Tom Lydon, editor of the ETF Trends newsletter, said he expects ETFs to continue to grow as investors realize their fee benefits. ETFs also have room to gobble more assets in 401(k) retirement-savings plans, where they have been little used to date, Lydon said.

REAL MARKETPLACE

Fidelity’s strategy is something of a contrast with the eight ETFs introduced by Charles Schwab Corp in November, which it also said it would allow customers to trade for free online.

Lydon expects both Fidelity and Schwab to gradually open their brokerage systems under similar terms as Fidelity’s deal with BlackRock, selling ETFs operated by other fund managers and taking fees directly in return. That is similar to the arrangements used in the mutual fund supermarkets both firms have operated for decades.

“They’re going to open the same deal to other ETF providers and pretty soon we will have a real ETF marketplace,” Lydon added.

Investment Analysis

(Reporting by Ross Kerber; editing by Andre Grenon)

Fidelity’s ETF deal is a bet on sector’s growth