Push back on ETF fees

The Wall Street Journal had an interesting story about Fidelity and exchange traded fund fees on Thursday. Many ETFs are touted as a way for individual investors to gain exposure to various asset classes.

But according to the WSJ, the fees may make it harder for Fidelity to capture market share:

Some financial advisers said they would stop using Fidelity Investments’ trading platform to buy certain exchange-traded funds because of high fees that kick in when investors sell.

Fidelity on Wednesday announced it would begin offering 65 ETFs from BlackRock Inc.’s iShares unit without charging customers a trading commission. The deal expands a previous agreement involving 30 commission-free ETFs.

But the Boston money manager is tacking on an additional fee of $7.95 a trade to investors who sell the ETFs within 30 days and to financial advisers who sell within 60 days.

Advisers also complained that Fidelity replaced 10 of the commission-free iShares ETFs on its previous menu. Nine of the new ETFs have lower trading volumes, suggesting they are less popular with investors.

The episode is another blow for Fidelity, which has missed out on the ETF boom of the past several years. Investors have favored stock ETFs over actively managed stock-mutual funds—Fidelity’s specialty—since 2006. Last year, investors poured $54.8 billion into stock ETFs and yanked $131.5 billion from actively managed U.S. stock funds, according to investment-research firm Morningstar Inc.

While rivals Vanguard Group Inc. and BlackRock have built big ETF businesses, Fidelity has barely made a dent.

While Fidelity continues to lose ground in this space, some rivals are finding it lucrative, the WSJ said.

Fidelity has much riding on the iShares deal. Investors pulled $24.4 billion from Fidelity’s stock funds in 2012, and its operating revenue dropped 1% to $12.6 billion.

By becoming a partner with BlackRock, the largest ETF provider in the U.S., Fidelity hopes to gain exposure to the fast-growing ETF market.

But a backlash from financial advisers could derail those plans. The additional fees “could alienate their core market,” said Scott Freeze, president of Street One Financial, an ETF trading and advisory firm.

Advisers said they are worried the redemption fee will hit hardest investors with less money. “If you’ve got a million-dollar account, then it’s not going to be huge,” Mr. Tuttle said. “If you have a $2,000 account, that’s massive.”

Rivals such as Vanguard, Charles Schwab Corp. and E*Trade Financial Corp. don’t charge a redemption fee on commission-free ETFs. TD Ameritrade Holding Corp. charges $19.99 a trade if an investor or financial adviser sells within 30 days.

Stories like these are important so investors can evaluate where their money is going to make sure they’re getting the best deal possible. The news follows an announcement about Fidelity ramping up its offerings, according to the Boston Globe:

Fidelity Investments is ramping up its small presence in the growing business of exchange-traded funds by expanding a three-year 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 does not have anything to rival that client base.

Boston-based Fidelity and New York-based BlackRock announced the partnership Wednesday. The companies agreed in early 2010 to cooperate on a smaller scale in a three-year deal that expired. Under it, 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 $250 billion in assets, those ETFs invest in US 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.

Either way, Fidelity should examine its offerings to see if it can actually capture the market share it is looking to gain.