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What happens when a big manufacturer joins forces with a big distributor? BlackRock (the largest provider of exchange traded funds via iShares) and Fidelity Investments (the largest online brokerage by assets) aim to find out. The two titans of asset management have teamed up on ETFs in a strategic alliance that involves expanding an existing deal by doubling the number of iShares ETFs that can be traded commission-free on Fidelity's platform. Fidelity, which specialises in old-school, actively managed mutual funds, also plans to sell managed portfolios and investment strategies using iShares' passively managed ETFs.
The fast-growing market for exchange-traded products, now with $2-trillion of assets, is dominated by its three largest providers – iShares with a 39 per cent share globally, State Street with 17 per cent and Vanguard with 13 per cent, according to ETFGI. Competition has been heating up. Vanguard has been reducing its ETF fees as assets grow. Charles Schwab, a smaller player, has aggressively slashed prices to lure assets and BlackRock has also cut fees on some of its funds. (State Street has so far stayed out of the price fight.) Ranked by the average asset weighted expense ratio across all of their ETFs, Schwab's now are the cheapest, according to Morningstar, followed by Vanguard, then State Street and then iShares.
With their beefed up alliance, BlackRock, which has strong institutional distribution, gets a direct avenue to retail investors. For Fidelity, the partnership represents a way to develop an ETF presence without having to compete with highly entrenched players in plain-vanilla, passively managed ETFs where fees are shrinking, in particular. Fidelity can now concentrate on actively managed and other ETFs where it can use its expertise and presumably charge more money.