The evolution of exchange-traded funds took a giant step forward recently, but most investors missed it. Soon, however, it might be hard to ignore.
Mutual fund giant Fidelity Investments announced that it will offer 25 iShares exchange-traded funds commission-free to its customers. The move answers rival Charles Schwab, which offers eight new ETFs commission-free.
And it’s a move that signals a new era not only for ETFs but for all fund investors.
The ETF difference
Exchange-traded funds are, essentially, mutual funds that trade like stocks. Whereas a traditional fund trades only at its daily closing price, an exchange-traded fund can be priced minute by minute like a stock.
For most of their existence, ETFs have been index-based products, but actively managed funds — in which portfolios are run on managers’ gut instincts, intuition and skill — have surfaced of late.
A really big deal
One drawback to ETFs has been trading commissions. For investors who regularly slug money into funds — putting in $100 or $250 a month, for example — even a discounted commission of $7.95 represents a significant drag on investment return, especially when investors can put all their money to work in a traditional no-load fund.
That’s why Fidelity’s move is a big deal. The Boston-based company is partnering with iShares, a unit of BlackRock (BLK, news, msgs) that is the giant in the ETF business, with a 50% market share. In so doing, Fidelity is striking hard at Schwab, which offers commission-free trades on eight ETFs.
Those funds have brought in about $550 million since their recent launch.
By comparison, the 25 iShares products that Fidelity will offer commission-free have more than $212 billion in assets. The smallest fund has $765 million. The asset size means better liquidity and trade execution and, typically, lower management fees. (Read about the deal at Fidelity.com.)
Among the commission-free iShares ETFs available through Fidelity are several twists on the Standard & Poor’s 500 Index ($INX), the Russell 1000 and 2000 indexes, a number of international and world stock index funds, and some bond funds.
Are ETFs better than mutual funds?
The lineup is impressive because it includes the building blocks of core portfolios rather than the types of investments that are normally traded frequently. In this way, Fidelity appears to be luring buy-and-hold investors — people who pony up little bits of cash regularly and who have avoided ETFs because a commission would take a big bite from a small deposit — while still collecting commissions from traders who have already migrated to this space.
(Fidelity announced the ETF deal as part of a larger announcement about reduced online equity-trading commissions for all customers.)
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