The cut-throat price war involving exchange traded funds escalated on Tuesday after Charles Schwab and Fidelity simultaneously announced that they would offer more commission-free ETF trading.
Schwab said it would double the number of ETFs that can be traded without paying a commission on its OneSource platform to more than 500. Boston-based rival Fidelity has a matching offer after expanding its commission-free ETF platform for individual investors and advisers from 265 ETFs to more than 500.
The price cuts by Schwab and Fidelity underline the growing importance of ETF trading for online brokers. Leading ETF managers are ferociously competing for business by reducing annual management fees. The battle has spread into offering ETF trading at zero cost in the hope that clients can be sold other products.
“The more customers [online brokers] can attract, the more commission-free ETFs their clients will buy,” said Martin Small, head of US iShares at BlackRock.
Investors will be able to buy 90 BlackRock iShares ETFs commission-free on Schwab’s platform for the first time from March. Its commission-free line-up includes more ETFs from Invesco, State Street, WisdomTree, Standard Life Aberdeen, Alps Advisors, Direxion, Global X, John Hancock, JPMorgan Asset Management and Pimco.
Schwab views its offer of commission-free ETFs from multiple providers as a way to stimulate investor interest in its own-brand ETFs. Investor inflows into the OneSource platform totalled $22.8bn last year, accounting for half of the total ETF flows at Schwab in 2018.
Fidelity’s move follows its decision in 2018 to launch a range of index-tracking mutual funds that carried zero management fees. That initiative represented the group’s most determined response to competition from Vanguard, which has a reputation as the industry’s most aggressive competitor on fund fees.
“The race to zero with equity trading commissions will continue,” said an analyst who asked not to be named.
He said growth in commission-free ETF trading would force rival brokers to focus more on generating profits from managing cash balances held by clients and receiving payment for order flow.
The moves by Schwab and Fidelity are also a response to the launch of a new e-broker service by JPMorgan Asset Management. That service, branded as You Invest, provides clients with 100 free stock or ETF trades in their first year and undercuts competitors by reducing the base equity trading commission rate to $2.95 a trade.
JPMorgan already provides financial services to an army of wealthy US retail investors. Analysts expect the You Invest initiative to strengthen its position against online brokers including E*Trade Financial and TD Ameritrade.
The escalation in price competition has prompted speculation that E*Trade Financial could be vulnerable to a takeover bid.
Credit Suisse analysts said last year that potential buyers, such as Schwab and TD Ameritrade, may offer a lower bid for E*Trade Financial if they believed that the brokers’ price war would drive trading commission rates even lower.
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