With BlackRock deal, Fidelity bets on ETFs Commentary: Deal could revamp retirement plans

By Chuck Jaffe, MarketWatch

The world’s biggest provider of exchange-traded funds and the world’s largest active mutual fund manager have struck a deal that will make more of the big, brand-name ETFs available without transaction costs.

Fidelity Investments and BlackRock Inc BLK +1.71%   announced a new strategic alliance Wednesday that will give Fidelity’s 10 million customers increased and improved access to iShares ETFs. The combined power of the two powerhouses had many industry watchers believing this deal is a first step in developing capabilities that could dramatically alter the ETF landscape. Under the new agreement — which effectively extends a three-year-old deal between the firms that was set to expire — Fidelity will more than double its current commission-free ETF offerings, and will also create new portfolio strategies using iShares as the basis for tactically managed investment accounts.

“This exclusive long-term partnership really is an extension but a broadening and deepening of the partnership over the last three years,” said Kathleen Murphy, president of personal investing at Fidelity Investments. “We plan to leverage our combined strengths to provide leading ETF products to our customers.”

Fidelity is raising the number of iShares products that can be traded commission-free on its website from 30 to 65, with the additions including all 10 iShares Core ETFs, a relatively new offering constructed to be the building blocks of an ETF portfolio. The entire iShares line currently includes 280 funds.

Perhaps more important is that the 65 ETFs that can be traded sans commission are among iShares’ most-popular issues, rather than being funds that have not drawn much following; all told, the 65 iShares ETFs in the program hold close to 18% of all ETF assets.

That is key because the Fidelity-BlackRock deal was announced just weeks after Charles Schwab Co. SCHW +2.09%   unveiled its new ETF OneSource program, which made 105 exchange-traded funds available on a commission-free basis. While the Schwab program offers more issues, critics suggested that its selection of fee-free options was limited and included few popular, big-name, big funds. The 105 funds currently available free in the OneSource program hold about 3.5% of all ETF assets. What Fidelity and BlackRock officials steadfastly avoided discussing about the deal was just where it could lead in the future, in terms of combined funds or ETFs.

For all of its fund-management prowess, Fidelity has been mostly outside of the ETF business. Much of that is because the Boston firm’s specialty is in active management, while exchange-traded funds effectively are index funds built to trade like stocks. BlackRock’s iShares are all index offerings, but the ETF business has been slowly coming around to the idea that there’s a place in the industry for actively managed funds.

Over a year ago, PIMCO opened an ETF version of PIMCO Total Return BOND +0.04%   — run by legendary manager Bill Gross — that has been hugely popular. While firms have been slow to move active management over to the ETF platform, such a migration ultimately seems inevitable. With Fidelity’s stable of actively managed funds, that leads to images of a more expansive partnership, one that could bring something like, say, iShares Fidelity Contrafund to life.

“If there is an industry move to turn actively managed funds into ETFs — and ultimately we know that is what the industry is moving to — you could see this partnership really helping both sides, because Fidelity doesn’t have much of an ETF presence and BlackRock’s efforts at running actively managed mutual funds haven’t been all that great,” said industry consultant Geoff Bobroff.

For now, however, the logical extension of the partnership is that it makes iShares not only more available on a commission-free basis, but gets more employers working with Fidelity to include a self-directed brokerage window in their plans, which would then allow those investors to access iShares offerings as part of their 401(k) or other savings program.

“With current technologies, ETFs don’t really have a place in the retirement plans, except for through self-directed brokerage accounts,” explained Mark Wiedman, global head of iShares at BlackRock. “But investors who want ETFs in their retirement plans want access to those kind of accounts, and to the extent that iShares will be more readily available without transaction fees in those accounts through Fidelity, we think [self-directed brokerage accounts] will become a more attractive option for retirement investors.” 

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