Fidelity Slashes Commissions in Challenge to Schwab (Update5)

Feb. 2 (Bloomberg) -- Fidelity Investments reduced online commissions for stock transactions in the U.S. by 60 percent and waived trading fees on two dozen exchange-traded funds, in a bid to attract investors and challenge Charles Schwab Corp.

Fidelity, the world’s largest mutual-fund company, will cut commissions to $7.95 from as much as $19.95 and stop levying different charges depending on how often clients trade, the Boston-based company said in a statement today. Trading fees on 25 exchange-traded funds from BlackRock Inc.’s iShares unit will be scrapped.

Fidelity and San Francisco-based Charles Schwab are vying for customers that are coming back to the stock market after the U.S. benchmark soared 63 percent from a 12-year low in March. Schwab, the largest independent broker by client assets, cut its online-trading charge to $8.95 in January and in November started waiving fees on ETFs, the fastest-growing segment of the fund industry.

“This strikes me as a direct response to Schwab,” Jim Wiandt, publisher of IndexUniverse.com in New York, said today in an e-mail. “We’re seeing the beginning volleys in something that could become much bigger and ultimately really chip into the active space,” said Wiandt, whose site covers index mutual funds and ETFs.

Shares Fall

Shares of Schwab, E*Trade Financial Corp. and TD Ameritrade Holding Corp. fell after Fidelity’s announcement. Schwab lost 1.1 percent to $18.23 at 4:30 p.m. in New York. E*Trade, an online brokerage based in New York, retreated 3.8 percent to $1.53 and TD Ameritrade of Omaha, Nebraska, slumped 3.2 percent to $17.64.

David Weiskopf, a spokesman for Schwab, said the company “is very pleased to see Fidelity follow our lead” in cutting prices. Schwab will continue to make changes to fees and products as warranted, he said.

“We regularly monitor overall customer satisfaction with an emphasis on service, pricing and product to ensure we address customer needs as the marketplace demands,” Pam Erickson, a spokeswoman for E*Trade, said in an e-mail.

Kim Hillyer, a spokeswoman for TD Ameritrade, didn’t return a call seeking comment.

In the past year, Fidelity has tried to lure brokerage customers by joining with private-equity firm KKR & Co. to distribute shares of companies raising money through initial public offerings, and by enabling clients to trade stocks in 12 non-U.S. markets. Closely held Fidelity has $1.5 trillion in fund assets. Through its brokerage unit, the firm sells more than 10,000 funds, including its own and those offered by other money managers.

ETF Growth

Fidelity, known for its actively run mutual funds led by managers such as William Danoff and Harry Lange, sat out the growth in the ETF business as assets swelled more than 10-fold over the past decade. ETF sales soared as investors sought low- cost alternatives to active funds, which are composed of individual securities picked by portfolio managers.

Investors pulled $8.8 billion from stock mutual funds in the U.S. in 2009 after withdrawing a record $233.8 billion in 2008, data from the Investment Company Institute in Washington show. ETFs assets in the U.S. surged 46 percent to $777.1 billion last year, driven by $116.5 billion in sales, ICI’s data show.

Fidelity’s 25 commission-free ETFs include the iShares S&P 500 Index Fund, iShares Russell 2000 Index Fund, iShares Barclays Aggregate Bond Fund, iShares MSCI EAFE Index Fund and iShares MSCI Emerging Markets Index Fund. Together, the 25 ETFs have about $200 billion in combined assets.

Diversification Tool

BlackRock’s iShares will be able to expand its reach to retail investors, who currently account for about 10 percent of U.S. ETF assets, Mike Latham, head of iShares in the U.S., said in an interview. BlackRock iShares is the largest ETF provider, with about $379 billion in assets in the U.S.

“Small investors understand that ETFs are a good way to get diversification,” Latham said. “This is a sign of the acceptance of iShares ETFs well beyond the sophisticated investor.”

Options trades executed online will also cost $7.95, plus 75 cents per contract, Fidelity said.

To contact the reporters on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net; Craig Trudell in New York Ctrudell1@bloomberg.net.