BOSTON (Reuters) - Fidelity Investments has expanded its 3-year-old partnership with BlackRock Inc (BLK.N) to offer its customers free trading of more exchange-traded funds, as the once-dominant mutual fund company strives to catch up in a faster-growing market.
Fidelity brokerage customers will be able to trade 65 BlackRock iShares ETFs without paying a commission, up from 30 funds currently, the two firms said on Wednesday.
BlackRock will also help Fidelity develop an investment strategy for clients based on a mix of ETFs and will support some of the firm’s own efforts to start a new line of equity sector ETFs.
Boston-based Fidelity, which manages some $1.7 trillion, mostly in mutual funds, has largely been left behind in the ETF explosion of the past decade.
By contrast, BlackRock acquired top ETF provider iShares in 2009. Among its nearly $4 trillion of total assets, it oversees $708 billion of ETFs.
Neither BlackRock nor Fidelity would say how many customers have used the free trading program over the past three years or how much money they have invested in iShares funds.
New York-based BlackRock pays Fidelity marketing fees for the commission-free ETF transactions as part of the deal.
The company said it wanted more access to Fidelity’s millions of brokerage customers and to registered investment advisers who use Fidelity’s platform.
“When you’re in a multi-year partnership with the world’s leader, it makes a lot of sense to double down,” said Mark Wiedman, global head of BlackRock’s iShares unit.
About half of the added funds are in the fixed income area, including popular categories like short-term U.S. Treasury bonds and emerging market bonds. Country-specific stock funds for Japan, India and China were also added.
The expanded offerings included all 10 of BlackRock’s new “core” iShares line-up, which carry lower fees to better compete with Vanguard Group’s ETFs.
The move follows Charles Schwab Corp’s (SCHW.N) announcement last month of a free trading platform for 105 ETFs from six providers, but not BlackRock. Participants included State Street Corp (STT.N), the second-largest manager of ETFs; Invesco’s (IVZ.N) PowerShares; and Schwab’s own small ETF lineup.
Both Schwab and Fidelity are seeking to minimize the “free rider” problem that ETFs created, said Brad Hintz, an analyst at Sandford Bernstein.
Before ETFs were popular, brokerage firms collected sizable marketing fees from fund companies when customers bought mutual funds. But they collected nothing more than the customer’s small trade commission on ETF sales.
“This was a nuisance originally but in recent years has become more and more significant as ETFs have grown at the expense of the ‘paying clients,’ the mutual fund companies,” Hintz said.
Now, with the new free trade ETF platforms, the brokerages can again collect marketing fees from the fund companies.
Despite the heated competition between the two brokers, Fidelity’s expanded partnership with BlackRock was not a response to the Schwab offering, said Kathleen Murphy, president of personal investing at Boston-based Fidelity.
“We’ve been proactive from the start,” she said. “We’re not being reactive.”
Wednesday’s deal gives BlackRock increased promotion to retail customers for its ETF line, helping it battle Vanguard. Valley Forge, Pennsylvania-based Vanguard has gained ETF market share at BlackRock’s expense in recent years, helped by its tremendous popularity with small investors.
Fidelity manages a single, small ETF but has filed plans with the U.S. Securities and Exchange Commission to offer a line of equity sector funds, including some that would be actively managed instead of passively tracking market indexes.
Under Wednesday’s expanded deal, BlackRock will provide support for Fidelity’s passive sector funds, while Fidelity concentrates on the actively managed ETFs, Murphy said. She declined to provide further details.
Reporting by Aaron Pressman; Editing by Lisa Von Ahn and Dan Grebler