Bt Investments Blog

BOSTON -- The evolution of exchange-traded funds took a giant step forward this week, but most investors missed it. Soon,
however, it may be hard to ignore.

Mutual-fund giant Fidelity Investments announced that it will offer 25 iShares
exchange-traded funds commission-free. It's a move that signals a new era not only for ETFs but for all fund investors.

Exchange-traded
funds are, essentially, mutual funds that trade like stocks. Thinking of it in car terms, it is like a car manufacturer producing
two different models that are built on the same chassis. The basic body part is the mutual fund, the investment pool that
historically has provided professional management and diversification at a reasonable cost.

Traditional funds
trade only at the closing prices from the end of the day, whereas an exchange-traded fund can be priced minute-by minute.
For most of their existence, ETFs have index-based products, but actively managed funds -- where portfolios are run on the
manager's gut instinct, intuition and skill rather than being based on an index -- have surfaced of late.

Real
big deal

One drawback to ETFs has been trading commissions. For an investor who regularly slugs money into a
fund -- putting in $100 or $250 a month, for example -- even a discounted commission of $7.95 represents a significant drag
on investment return, especially when the investor can put all their money to work in a traditional no-load product.

That's
why Fidelity's move is a big deal. The Boston-based firm is partnering with iShares -- a unit of BlackRock Inc. (BLK)
that is the giant in the ETF business with a 50% market share. In so doing, Fidelity is striking hard at rival Charles Schwab
Corp. (SCHW)

Competition drives innovation and
change in any industry. Schwab is offering commission-free trades on eight ETFs managed by the firm; it has brought in about
$550 million since their recent launch.

By comparison, the 25 iShares products that Fidelity will offer commission-free
have more than $212 billion in assets; the smallest fund has $765 million in assets. That asset size means better liquidity
and trade execution and, typically, lower management fees. See ETF Investing column on Fidelity's move.

Among
the iShares ETFs now available through Fidelity with no transaction fee are several twists on the Standard & Poor's 500-stock
index (SPX) , the Russell 1000 and 2000 (RUT)
indexes, a number of international and world stock index funds, and some bond funds.

The line-up is impressive,
because these are the issues necessary to build core portfolios, rather than investments that individuals frequently trade.
In this way, Fidelity appears to be trying to attract buy-and-hold investors to ETFs -- the kind of people who do pony up
little bits of cash regularly and who have avoided ETFs because a commission would take a big bite from a small deposit --
while still collecting commissions from the traders who have already migrated to this space. (Fidelity announced the ETF news
as part of a larger announcement about reduced online equity-trading commissions for all customers.)

Advantage:
Investors

There's a good chance that other providers will be forced to find a way to waive commissions on some
ETF trades. That response is likely to be driven from both sides of the business, with ETF companies pushing for commission-free
sales and brokerage firms trying to cut deals with money management firms so that they're seen as a "destination" for ETF
investors. (The best odds are that TD Ameritrade fires the next shot.)

That, in turn, should fuel the evolution
of the ETF industry. The advent of no-load mutual funds, sold without a sales charge to compensate the adviser, helped to
boost do-it-yourself investing. Studies have already shown that financial advisers and money managers have been gravitating
towards ETFs, and now they can create core portfolios without trading costs interfering with long-term investment plans.

Now,
with gazillions of dollars in baby-boomer money set to flow out of tax-deferred accounts, ETFs will be better positioned for
individuals and advisers. The more money ETFs get, the more they can control costs and cut expense ratios -- another place
where ETF investors may someday see price breaks.

Remove the transaction costs and you can foresee a time when
investors simply look for funds that are managed in a way that's most appealing, without regard to whether the fund is traditional
or exchange-traded.

For fund investors, that would mean being able to put the most money to work, rather than
sharing the wealth with brokerage firms and money managers.

It is still not known who will replace his boss. At 79, Edward "Ned" Johnson III remains CEO and chairman, titles he's held at privately owned Fidelity since 1977.

The nation's largest mutual fund company has a succession plan, but it isn't saying when Johnson will step down.

The company, based in Boston, announced the retirement of 63-year-old Lawson on Wednesday. He will stay with the company as an adviser.