Fidelity Investments, the asset manager that watched from the sidelines as exchange-traded funds went from zero to $1.4 trillion over the past 20 years, is increasing its reliance on BlackRock Inc.’s iShares to compete in the business.
The number of ETFs from BlackRock’s iShares that can be traded commission-free by Fidelity clients will more than double to 65, according to a statement today from Boston-based Fidelity and New York-based BlackRock. ETFs from iShares, the industry’s largest provider, will be used within Fidelity’s managed accounts later this year, and BlackRock will help Fidelity develop ETFs tied to sector strategies. In exchange, BlackRock will reach more U.S. retail investors directly.
The partnership shows how Fidelity, the 67-year-old firm led by Edward C. Johnson III and known for such innovations as direct sales to individual investors and income-oriented stock funds, is getting more aggressive in trying to benefit from the growth in ETFs even without its own lineup on the market. The deal helps BlackRock vie for individual investors with such firms as Charles Schwab Corp., which said last month it was expanding commission-free trading in ETFs by partnering with State Street Corp. and Invesco Ltd.
“Growth in the ETF marketplace has continued strongly and is going to continue to grow over the next decade,” Kathleen Murphy, president of personal investing at Fidelity, said in a telephone interview yesterday. “We want to make sure we provide a compelling offer to our investors.”
The ETF business has grown rapidly over the past two decades, benefiting money managers such as BlackRock, Vanguard Group Inc. and State Street. In the 12 months ended Jan. 31, ETF assets in the U.S. increased 24 percent to $1.4 trillion, compared with about 3 percent for mutual funds, which hold $13.4 trillion, according to data from the Washington-based Investment Company Institute.
Fidelity, which managed $1.7 trillion in assets as of Jan. 31, said its operating income declined 29 percent last year as pressure on fees, low interest rates and redemptions from its active equity funds hurt revenue. Investors pulled a net $5.3 billion from Fidelity’s asset-management unit, including $35.3 billion from equity funds. BlackRock, which is the world’s largest asset manager, saw its operating income rise 8.5 percent in 2012. The firm’s stock and bond ETFs drew $82 billion in client deposits last year, more than offsetting the $18 billion in withdrawals from active stock funds, as total assets reached a record $3.8 trillion.
Fidelity has been working toward opening a series of actively managed ETFs. The firm hired Anthony Rochte from State Street to head the effort in March 2012 and filed a request with the Securities and Exchange Commission in December to open a wide range of active funds, starting with a bond fund.
“If you’re going to go to a battleship party, you’d better bring a battleship,” James Lowell, editor of Fidelity Investor, an independent newsletter in Needham, Massachusetts, said in an e-mail. “Fidelity’s lineup enables them to return the broadsides launched by both Schwab and Vanguard and others, while safeguarding their brand.”
BlackRock and Fidelity agreed to offer 25 iShares funds commission-free to Fidelity’s clients in February 2010, and the lineup was expanded to 30 a year later. The 65 funds now made available without commissions include the 10 iShares core ETFs that BlackRock introduced in October as well as products that invest in other international and domestic stocks, fixed income, commodities and specialized equities.
Registered investment advisers will also be able to access the ETFs commission-free. The funds will be sold through Fidelity’s retail brokerage business.
The companies don’t have a revenue-sharing agreement in place, which is intended to defray servicing costs to provide the funds without commissions, said Mark Wiedman, global head of iShares. For iShares ETFs, Fidelity receives compensation from the ETF sponsor, its affiliates or both as part of an exclusive, long-term marketing program that includes promotion of iShares funds and their inclusion in certain platforms, according to today’s statement.
In 2012, BlackRock made changes to its ETF unit after losing market share to Vanguard, which has boosted assets in the funds with lower-cost products. BlackRock saw its U.S. ETF market share fall 1 percentage point in 2012 to 41.8 percent, compared with an increase of 2.1 percentage points for Vanguard to 18.3 percent, according to State Street Global Advisors.
BlackRock in October created the iShares Core Series, which is made up of six ETFs with lowered fees and four new ones, to attract individual and institutional clients looking to invest over the long term. It had earlier combined the sales teams for iShares and BlackRock’s retail funds to increase market share. The company also started a five-year branding campaign last year and the latest iteration recommends investors put their money in ETFs, high-quality stocks and products that generate higher income.
“This is pulling together a fourth and critical plank to service direct customers,” Wiedman said in a telephone interview yesterday. “This is a big step in connecting with that client base, which we don’t speak to today directly.”
BlackRock, which acquired iShares as part of its purchase of Barclays Global Investors in December 2009, is unique among money managers in having almost equally big businesses devoted to passive and active strategies. BlackRock had $728 billion in its iShares stock and bond funds as of Dec. 31. The firm had about $944 billion in active stock and bond strategies, and $110 billion in alternatives.
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