Fidelity to Charge for ETF Trades Without Sponsor Support

Fidelity has announced plans to implement a new fee structure for exchange-traded fund (ETF) purchases. If the fund sponsors do not consent to the brokerage paying support fees, the investors will now be charged $100 for each trade on an ETF valued at $2,000 and over.

On trades equivalent to or less than $2,000, the fee will be 5% of the trade value. This step represents a major departure from the industry’s recent tendency to provide customers with cheap trading options.

The brokerage side of Fidelity wants ETF sponsors to pay a support payment of 15% of revenue to prevent these charges. The phase-in of these fees is a deviation from more than a decade of reduced trading costs, which were aimed at boosting customers. Fidelity’s introduction of these fees, as a result, is part of the industry’s re-evaluation of brokerage platforms’ revenue models.

Impact on ETF Sponsors and Investors

The new plan of the charges for the service charge of Fidelity, which is to become operational in June, is evoking mixed reactions among ETF providers. Although a number of issuers, especially smaller firms that lack clout in bargaining, have given in to the fact that the support fees cannot be avoided, some are still in discussions on the conditions of payment. This situation might provoke additional costs for investors, particularly in future ETF offerings, as issuers likely increase fees that help to recover the support payments.

Fidelity apparently asking ETF issuers for *15%* of total fund revenue in order to be included on platform & avoid investors being charged $100/trade…

One issuer: “The next ETF we come out w/, we’re going to go to market w/ max fee we can justify.”

Brutal.

via @double_you_ess pic.twitter.com/FxehnqkAue

— Nate Geraci (@NateGeraci) April 9, 2024

Similarly, David Young, Chief Executive Officer of Regents Park Funds, has expressed worries about growing financial pressures, which could lead to the firm issuing new ETFs with higher fees to help recover some of the costs. The new fee schedule will allow Fidelity to cover a range of services, including investment research and educational materials, provided to customers without its promoting any particular ETFs.

Reactions and Comparisons with Industry Standards

The proposed $100 fee for ETF trades has drawn much criticism from industry experts, who consider it grossly out of sync with what investors are currently used to. One of the analysts, Elisabeth Kashner from FactSet, outlined the possibility of these expenses being spread out among all the fund investors, therefore increasing the total costs. This could result in funds losing their competitiveness, underlining the crucial role of maintaining low expense ratios in the competitive ETF market.

Charles Schwab, another big player in the commission-free ETF trading area, already charges some ETF sponsors 10%. Yet Schwab has not made a statement regarding their intention to launch a similar fee program. Fidelity’s move consequently highlights a general re-evaluation within the industry about the viability of commission-free trading models and the quest for alternative sources of revenue.

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