Fidelity, BlackRock's iShares teaming up to expand ETF alliance

BOSTON – Fidelity Investments is ramping up its small presence in the rapidly growing exchange-traded fund business by expanding a 3-year-old partnership with BlackRock Inc.’s iShares unit, the largest ETF provider.

BlackRock, in turn, will be able to sell its iShares ETFs to a much broader range of investors, including Fidelity customers and their industry-leading 18.5 million brokerage accounts. BlackRock doesn’t have anything to rival that client base.

Boston-based Fidelity and New York-based BlackRock announced the partnership on Wednesday. The companies agreed in early 2010 to co-operate on a smaller scale in a three-year deal that expired.

Under that agreement, Fidelity offered its brokerage clients commission-free online trades on 30 iShares ETFs. The commission-free total expands to 65 under the new pact. With a total $250 billion in assets, those ETFs invest in U.S. and foreign stocks and bonds, as well as commodities.

Fidelity also will create new options for its customers to build investment portfolios using iShares ETFs. And BlackRock agreed to help Fidelity develop new funds that passively track narrow segments of the market, such as stocks of companies in specific industries.

Fidelity hasn’t been a significant player in directly offering ETFs, instead serving as a distributor offering its clients ETFs managed by other firms like iShares.

Similar to low-cost index mutual funds, ETFs track segments of the market and try to match a benchmark stock or bond index rather than beat it. But ETF shares can be traded throughout the day like stocks. That makes it possible to lock in a preferred price without waiting for a closing price. Mutual funds are priced only at the close of daily trading.

Another appeal of ETFs has been a recent round of reductions in investment management fees, including cuts announced last fall by iShares and Charles Schwab. Index mutual funds have long been the first choice for anyone looking to invest on the cheap, but they’re now being undercut by the lowest-cost ETFs.

ETF assets have doubled over the past three years, reaching $1.3 trillion, and they continue to grow at a much faster pace than mutual funds. However, for every dollar in an ETF, investors have stashed $7 in mutual funds. ETF assets are projected to nearly double to almost $3.5 trillion by 2016, according to a recent study by Cerulli Associates.

About 1,200 ETFs are on the U.S. market, with BlackRock’s iShares recently commanding a market leading share of 44 per cent of all ETF assets, according to the research firm ETFGI. Combined, iShares, State Street and Vanguard commanded 84 per cent of the market.

But Fidelity, the second-largest manager of mutual funds behind Vanguard, has been late to venture into ETFs. In December, the privately held company filed a regulatory application to launch its first actively managed ETFs that seek to outperform the market, rather than match an index. Actively managed ETFs are a small but growing segment of the overall ETF market.

Kathleen Murphy, president of personal investing at Fidelity, said her company will continue to focus on developing actively managed ETFs as well as strengthening its existing lineup of managed mutual funds. The company will rely on iShares’ index-oriented ETF lineup, rather than launching Fidelity-branded index ETFs, she said.

Mark Wiedman, global head of iShares at BlackRock, said the agreement allows his company to partner with a company “that’s the leader in talking to the direct client, something that BlackRock does not have.”

As the end of the initial three-year deal approached, BlackRock decided to “double down” by expanding it, Wiedman said.

The new agreement will last longer than the earlier three-year deal, although the companies aren’t disclosing how long it will last.