Fidelity recently announced new changes to their commission-free ETF list.

When Blackrock iShares introduced their 10 new Core ETFs, I wondered how they would market these ETFs. Well, that question was answered today with Fidelity and Blackrock announcing a “long-term strategic alliance”, otherwise known as Blackrock writes a big fat check to Fidelity:

For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs.

The move definitely makes sense though, as Fidelity doesn’t have a broad line of in-house ETFs and iShares doesn’t have their own brokerage arm. In general, I think the move is a positive one for Fidelity customers as they now have exposure to a much wider range of low-cost index ETFs meant for long-term holding periods. There are now a total of 65 iShares ETFs where you can avoid the standard $7.95 trade commission. You could build a low-cost, diversified portfolio with just these ETFs, resulting in a weighted expense ratio of just 0.10%:

33% Core S&P Total U.S. Stock Market (ITOT)
33% Core MSCI Total International Stock (IXUS)
33% Core Total U.S. Bond Market (AGG)

However, a few big names were also removed from their commission free list – iShares MSCI EAFE (EFA), and iShares MSCI Emerging Markets (EEM), and most of their Russell Index-based ETFs. If you had a large position in one of these ETFs, now you’re either stuck paying the standard $7.95 commission or you’d have to replace them with their new “Core” versions and thus incur possible capital gains taxes. I’d certainly be annoyed. There will be a short grace period (details below).

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The stock market is at or near all-time highs, which means that brokerage firms should be seeing a lot more interest (for better or worse). Weekly business newspaper Barron’s just released their 2013 annual broker survey rankings. Here’s a snippet about their criteria:

We looked at eight categories of service, examining what can be traded online, how the tools work together across platforms, the design and capabilities of mobile platforms, educational offerings and customer service, as well as the nuts and bolts of placing and executing a trade. We closely scrutinized the various tools available for finding appropriate trades, including scanners and charts. When examining costs, we considered stock and options commissions as well as platform or maintenance fees, margin debt, and charges for transferring an account out.

Barron’s notes that overall, the online experience is improving with a growing number of brokers offering their clients real-time quotes, easier-to-use websites, and a better mobile trading experience. They also admit that their overall rankings are based on the needs of their subscribers – namely “wealthy, active traders”. As such, their overall winner was again Interactive Brokers, a broker designed for highly-active traders with an extensive feature set and low commissions. However, IB also has a minimum opening balance of $10,000, a minimum monthly fee of $10 even if you don’t trade at all, and customer service that does not cater to casual investors.

I am not an active trader, but I still like having real-time quotes, a nice user interface, and friendly service when I need it. Thankfully, Barron’s also ranked the brokers for the rest of us:

Top 5 Brokers for Novice Investors

1. TD Ameritrade. Performed well in customer service & education, research tools, and mobile offerings. Free real-time quotes from NYSE, AMEX, and NASDAQ Level 1 and 2. When placing an order, the trigger price is automatically set at the midpoint between bid and ask.
2. Fidelity
3. E-Trade
4. Charles Schwab
5. Capital One 360 Sharebuilder

Top 5 Brokers for Long-Term Investing

1. TD Ameritrade
2. Fidelity
3. Charles Schwab
4. Merrill Edge
5. E-Trade (down 1)

Top 5 Brokers for In-Person Service

1. Scottrade. Scottrade has over 500 physical branches across US, so that when you call you reach a human in that local branch. Free in-person educational seminars are offered as well.
2. Merrill Edge
3. Charles Schwab
4. Fidelity
5. TD Ameritrade

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The index fund fee wars continue… You may or may not know that Blackrock’s iShares is the largest ETF provider in the world, with over 250 US-listed ETFs and the largest asset base by a good margin. iShares ETFs tend to have big volume and are the favorites of Wall Street traders and also large money managers. But Vanguard is catching up, and iShares responded by making a move in October 2012 to appeal to long-term, buy-and-hold investors who want low-cost, broad, index ETFs. (I’m sure they also saw how people who wanted Emerging Markets exposure quickly switched from EEM to VWO due to the big fee difference.) See the official iShares press release for more details.

Below are the 10 ETFs that comprise the new iShares Core Series ETFs (4 new, 6 modified existing), along with their expense ratio, ticker symbol, and benchmark index. They are broken down into 4 US equity ETFs, 3 International equity ETFs, and 3 US bond ETFs.

The new expense ratios are very competitive with the corresponding Vanguard ETFs, usually within a few basis points. It would have been nice if they just lowered the fees on EEM instead of starting a whole new ETF IEMG, but remember that profit motive. The ETFs are gaining reasonable assets, so it appears to be a successful move so far.

For the individual investor, it will be interesting if iShares strikes a deal with a major brokerage firm to offer commission-free trades on these ETFs. Update: These Core ETFs are now part of Fidelity’s commission-free iShares ETF list .

Fidelity Investments made some cost-cutting moves recently to try and keep their index fund products competitive (full press release). This comes at the same time that their actively-managed equity funds are seeing large amount of withdrawals, per WSJ:

Investors pulled a net $35.3 billion from equity funds at the country’s second-largest mutual-fund company in 2012, according to Fidelity’s annual report released Friday. Of that total, the Boston-based company’s actively-managed stock funds – an essential component of its business – saw outflows of $24.4 billion during the year. That’s despite the strong performance of the funds, which collectively beat 74% of their peers last year, compared with 53% in 2011, according to Fidelity.

(Also noteworthy: Fidelity filed with the SEC in December 2011 to roll out their own line-up of index-tracking stock and bond ETFs, although I haven’t heard much since. In December 2012, Fidelity filed to start actively-managed ETFs as well.)

Reduced investment minimums. As of December 2012, Fidelity reduced the investment minimums on 22 equity and bond funds, including the 14 Spartan index funds listed below. The Investor Class investment minimum was lowered from $10,000 to $2,500, while the Fidelity Advantage® Class was lowered from $100,000 to $10,000.

Spartan 500 Index Fund
Spartan Extended Market Index Fund
Spartan International Index Fund
Spartan Total Market Index Fund
Spartan Emerging Markets Index Fund
Spartan Global ex U.S. Index Fund
Spartan Mid Cap Index Fund
Spartan Real Estate Index Fund
Spartan Small Cap Index Fund
Spartan Inflation Protected Index Fund
Spartan Intermediate Treasury Index Fund
Spartan Long-Term Treasury Index Fund
Spartan Short-Term Treasury Index Fund
Spartan U.S. Bond Index Fund

This is a pretty big move to bring in more retail investors, becoming more in line with Vanguard’s Investor and Admiral Class shares. As with Vanguard, share class conversions should occur automatically based on your investment amount, and the conversion is a tax-free event.

Lower expense ratios. As of January 2013, Fidelity also cut the overall expense ratios for certain share classes of 8 Spartan index funds. Below is a list of the affected funds and their new expense ratios for Investor/Advantage classes as of 1/1/13.

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Recently, Vanguard has made some big moves in the index fund space. Well, they were big for people in the business, but for individual investors it basically boiled down to some simple good news: even lower costs, which happily means larger numbers on my monthly statements.

In October 2012, Vanguard announced that they would be changing the benchmarks on 22 of their index funds from MSCI indices to either FTSE (international) or CRSP (domestic) indices. Essentially, companies like S&P (S&P 500) and MSCI are the “brand names” of the indexing world. However, creating an investable market-cap weighted index has basically become a commodity, so why not go “generic” where available? FTSE is part of a publicly traded company, but CRSP is short for University of Chicago’s Center for Research in Security Prices which is run as a non-profit.

Basically, MSCI wanted too much in licensing fees, so Vanguard dropped them. Remember that with Vanguard’s client-owned structure, the savings goes to the investor and not to shareholders or private owners. This move should result in lower expense ratios in the affected funds as well as the popular Target Retirement 20XX and LifeStrategy funds. Vanguard is taking the transition slowly over several months in order to minimize any capital gains, front-running, or market impact costs. Here is a list of all the affected funds and the new benchmarks. Notable changes include:

• Vanguard Total Stock Market Index Fund (VTSMX, VTSAX, VTI) will now track the CRSP US Total Market Index. It shouldn’t change significantly, but the new CRSP index does include more micro-cap stock exposure.
• Vanguard Total International Stock Index (VGTSX, VTIAX, VXUS) will now track the FTSE Global All Cap ex US Index. Here is another nice overview on the Rick Ferri Forbes blog, but basically there will only be slight changes.
• Emerging Markets Stock Index Fund (VEIEX, VEMAX, VWO) will now track the FTSE Emerging Index. The big change here is that FTSE has South Korea as a Developed market, whereas MSCI still has South Korea as a Emerging market. South Korean stocks were 15% of the MSCI-based ETF, so the new ETF should look a little different. This was going to happen sooner or later, anyway.

Bottom line: Vanguard disrupted the industry again, and others may have to follow eventually. Vanguard already has the asset size and client-owned structure that gives them the ability to maintain the lowest costs in the industry. Other providers may match or even beat their expense ratios, but they are doing it as a loss-leader and hoping to make it up elsewhere. Like milk or orange juice at the grocery store, this means whatever is on sale today may go up in price next week (or year, or decade). The difference is that when it comes to long-term investing, over time you will (hopefully) accumulate significant capital gains and selling them prematurely will results in a tax hit. I don’t want to have to switch investments later on in the game.