The Broker Wars Are Heating Up Again

After a year of intense competition, the price war among brokerage companies had started to quiet down in recent months. But Fidelity has upset the calm with another salvo of its own, fighting to protect its position by adding new offerings to its list of commission-free ETFs.

Filling in the gaps
Throughout the broker wars, Fidelity has followed its own path. Unlike competitors Vanguard and Schwab (NYSE: SCHW  ) , which offered proprietary ETFs to their customers, Fidelity initially decided to partner up with outside ETF provider BlackRock (NYSE: BLK  ) to offer 25 iShares ETFs at no commission to Fidelity brokerage customers.

At first, the offerings seemed sufficient, covering domestic and international stocks of various sizes, as well as a few bond funds. But in light of TD Ameritrade's (Nasdaq: AMTD  ) decision to give its customers access to over 100 commission-free ETFs from a variety of fund companies, Fidelity's ETF lineup had some glaring holes.

This week, Fidelity chose to fill some of those holes, announcing that it would add five more ETFs to its lineup. The ETFs include:

  • Two dividend-stock ETFs, iShares DJ Select Dividend Index (NYSE: DVY  ) covering U.S. stocks and iShares DJ International Select Dividend for international stocks.
  • The junk bond ETF iBoxx High Yield Corporate.
  • iShares Dow Jones US Real Estate (NYSE: IYR  ) , which owns shares of real estate investment trusts and other real-estate related companies.
  • The iShares MSCI ACWI ex US ETF, which invests in a basket of foreign stocks around the world including both emerging and developed markets.

Even though the moves may look minor in comparison to the more extensive lineups from some of its competitors, Fidelity accomplishes a great deal with these modest additions. Before the change, Fidelity's lineup let you zero in on exactly the size and style of domestic stocks you wanted in your portfolio, but implementing a typical asset allocation strategy was difficult because there weren't enough alternatives to stocks available. Now, the addition of high-yield corporate bond and REIT exposure will help many investors flesh out their portfolios in a more diversified fashion.

The move also responds to changing trends among investors. Right now, people are especially hungry for dividend stocks. With iShares facing competition from both SPDR Dividend ETF (NYSE: SDY  ) and Vanguard Dividend Appreciation, taking action to boost the visibility of its own flagship dividend stock ETF makes perfect sense.

What's next?
The open question is what will happen next in the broker wars. Given that iShares has hundreds of additional ETFs to choose from, there's always the chance that Fidelity will add even more ETFs to its commission-free offerings in the future. Meanwhile, Vanguard and Schwab can continue to release new ETFs of their own.

Overall, though, commission-free ETFs have succeeded in drawing billions in new assets to these brokerage companies. For brokers that haven't joined in on the ETF craze, such as E*Trade Financial (Nasdaq: ETFC  ) , the conspicuous absence of State Street's SPDR lineup from the front lines of commission-free ETFs makes it easy to speculate that it could be the next partner for a smart brokerage company seeking to make an effective late entry.

What to do
ETFs can be extremely useful in helping you either build a complete portfolio of index-style investments or as a supplement to individual stock picks you choose on your own. Teaming up with the right broker can give you cheaper access to exactly the ETFs you want to invest in. Although commission-free ETFs are only one factor in choosing the broker that's right for you, the trend toward lower costs and greater availability is a definite positive for investors going forward.

Learn more about top performing ETFs in The Motley Fool's special free report, "3 ETFs Set to Soar During the Recovery."

Fool contributor Dan Caplinger loves watching a good price war. He owns shares of Vanguard Dividend Appreciation. BlackRock is a Motley Fool Inside Value recommendation. Charles Schwab is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy helps you in the heat of battle.


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