Yield of Dreams

iShares Newest Distribution Channel: Fidelity

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If you thought iShares was a big player in the ETF business before, wait until the firm expands its partnership with Fidelity. In a partnership announced today, iShares will increase its access to Fidelity’s 10 million retail investors and the firm’s more than 3,000 RIAs.

Fidelity, long known as a mutual fund shop, announced a big push into the ETF space today; through a long-term strategic partnership with iShares, Fidelity will now offer 65 iShares ETFs commission-free, up from 30, to both the retail side and the RIA side. Fidelity will also partner with iShares in the ETF managed portfolio space, offering iShares’ existing model portfolios and collaborating on sourcing new ETF portfolios that may be placed on the Fidelity platform.

Part of the agreement also involved partnering on other areas of asset management with product creation, said Michael R. Durbin, president of Fidelity Institutional Wealth Services, Fidelity’s RIA custody unit. Fidelity intends to launch passive sector strategies with the help of BlackRock.

“There is an undisputable growth that’s occurring in advisors’ use of ETF products,” Durbin said.

Unlike Charles Schwab and Vanguard, iShares doesn’t have a brokerage unit to distribute its products, but the partnership with Fidelity will give it that access.

“iShares and State Street, even though they’re market leaders, they’ve got to be fearful looking at a Vanguard and Schwab and saying, ‘Boy these guys are really getting traction, most likely at our expense because they have direct access to retail,’” said Christian Magoon, CEO of Magoon Capital, an asset management consulting firm.

It can also help them compete on pricing: “iShares is going to have difficulty matching Vanguard in price because they don’t have a brokerage attached. Here’s a way that they can quasi do that, and not give up the whole space to Vanguard.”

How is it any different from what Schwab and TD Ameritrade offer? Todd Rosenbluth, director of ETF research at S&P Capital IQ, said Fidelity’s commission-free platform includes widely held and actively traded products, such as the iShares S&P 500 Index ETF (IVV), with $40 billion in assets, and the iShares Core Total U.S. Bond Market ETF (AGG), with $15 billion.

While the list includes 10 core iShares ETFs, it also includes funds that cover a narrower set of asset classes, including commodities, real estate and low volatility strategies, Durbin said.

“As we money continuing to flow into ETFs, the pie is growing, but this is very much a market share game,” Rosenbluth said.

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