Yesterday Fidelity supposedly upped the
ante in the ETF war with Schwab and TD Ameritrade by expanding its commission
free iShares lineup to 65 ETFs. Every article I have seen on this so far has
lauded the move. For buy and hold retail investors who are looking for a place
to build passive ETF portfolios then Fidelity's new offering might make sense,
but for RIAs who use ETFs to manage money tactically this deal is a disaster. What Fidelity has done is on the front end
they have appeared to improve their program with the hopes that nobody notices
that what they took away actually makes it much weaker. We see three major problems with the deal:
1. They are taking 10 ETFs off the list
as of 4/30. This could generate unnecessary capital gains from replacing those
ETFs in client accounts.
2. They are replacing high trading volume
ETFs with low trading volume ETFs.
3. They are charging short term redemption
fees on ETFs held for less than 60 days.
Removing 10 ETFs
For some reason Fidelity has decided to
remove 10 ETFs from its commission free lineup. This could create unnecessary
capital gains for investors. For example, we currently own the iShares MSCI
Emerging Markets ETF (EEM) in some clients accounts. Because we are tactical
managers we could sell this ETF at any time. We bought it commission free with
the expectation we would be able to sell it commission free. Now, as of 4/30
client accounts will be charged a commission when/if we sell. If we still own
it on 4/29 we might be forced to replace it, and potentially generate capital
gains, with the iShares Core MSCI Emerging Markets ETF (IEMG), which replaces
it on the list.
Replacing
high trading volume ETFs with low trading volume ETFs
Another problem with the 10 ETFs that Fidelity is
taking off the list is that many of them are actively traded while many of
their replacements are not. For example,
we often trade the iShares Russell 2000 ETF (IWM). According to an analysis from BlackRock IWM trades around $3billion/day so orders of
pretty much any size should be able to be executed within the bid/ask
spread. Now IWM is being replaced with
iShares Core S&P Small Cap (IJR).
This ETF trades an average of $65 million/day so larger orders would
probably have to be done a few cents outside of the spread, costing us and
clients money.
Short
Term Redemption Fees
Buried in the small print of this deal is that
Fidelity will charge short term redemption fees on ETFs held less than 60
days. Again, not a big deal for the buy and hold
retail investor but for tactical managers this is a deal breaker. We will often be in and out of ETFs within 60
days. The back end charges could
substantially eat into returns, especially for smaller accounts. I can understand why actively managed mutual
funds might want to scare off active investors with redemption fees but I can
see no reason why Fidelity should care if RIAs don't hold an ETF for 60
days.
To us, this looks like a decision made by the retail
side of Fidelity with no thought to how it would impact the institutional
side. For buy and hold retail investors
this could be an attractive offering.
For RIAs who are tactical or active and have decided to partner with
Fidelity then this deal is a slap in the face.
