Fidelity Reminds ETF Industry It Doesn't Have To Care
April 26, 2024·7 comments·In Brief
The financial industry spent two decades celebrating the elimination of trading commissions as a victory for investors. But beneath that narrative, the cost of doing business never actually disappeared. It just got restructured. When Fidelity demanded new revenue-sharing agreements from smaller ETF providers, it exposed something uncomfortable: dominance at the platform level creates a different kind of gatekeeping, and the firms that control the shelves don't need permission to rearrange them.
• The "free" narrative masks persistent extraction. Even as commissions vanished, Schwab's take rate (revenue across all client assets) has remained stuck in the mid-20 basis point range for decades. The mechanism changed, but the percentage stayed the same. The money didn't disappear. It just moved to a different line item.
• Net interest income is the only game that matters. At brokerage platforms, trading fees and advisory services are sideshows. The real money comes from parking customer cash in the system so the platform can earn spread income. Everything else, including which ETFs get promoted, is secondary to that core business.
• Platform dominance creates obligations that look nothing like regulation. Fidelity is a private company answerable to no one. When it decided to squeeze smaller ETF issuers with revenue-sharing demands, there was no legal violation, no regulatory intervention possible, and no real consequence. It's simply how supermarkets work. They decide who gets shelf space and on what terms.
• The small players have always lost this game. Large asset managers like BlackRock and Vanguard can spread costs over broader pools, leverage existing distribution advantages, and weather these disputes. Smaller ETF issuers will need to pay more for shelf space or disappear from platforms. This isn't new to the last 20 years. It's been the structure since the 1940s.
• The costs don't vanish, they get absorbed and passed along. Everyone will eventually roll over to these demands because the switching costs in financial intermediation are enormous. Distribution margins will quietly compress elsewhere, and investors will end up paying through higher fund expenses or lower yields. The fundamental question isn't whether Fidelity can do this. It's who ultimately covers the tab.
Subscribe Today to Read More
Unlock instant access to this and hundreds of other evergreen essays that explore the world of narrative through hard science and human wisdom.
- Make more informed decisions as an investor and citizen.
- See through the nudges of Big Politics and Big Media.
- Become a better consumer of news.
- Maintain your autonomy of mind in a swarm of narratives.
- Join a community of more than 100,000 truth-seekers.
Looking for Deeper Insights?
Unlock exclusive market intelligence, trade ideas, and member-only events tailored for investment professionals and active investors with Perscient Pro.
VISIT PRO
DISCLOSURES
This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
Comments
Fidelity is run by Abby Johnson, not Abby Joseph Cohen. The latter is a former star analyst at Goldman (and now Columbia B school prof).
This note reminded me of what I consider to be a classic from @rguinn
My fault as the editor for not catching that. Thanks, James!
I hate Fidelity. I don’t use their products…with one caveat: they have a money market fund that pays better than the other options out there and it’s my duty to get my clients the best yield I can, when all other things are equal.
I hate Fidelity and so do most of the people with whom I work. But we need the eggs.
DY, Vanguard Government MMF is 35-40 bps higher in yield than Fidelity
We used to have everyone in that fund, but then Vanguard stopped covering the back office expenses for a bunch of wirehouses so it vanished off of our menu. Nobody was happy about that.
Fund Manager Alpha may come from Retail Investors.
Continue the discussion at the Epsilon Theory Forum...