Ushering in a new phase of the ETF “fee-war,”  Fidelity Investments and BlackRock (NYSE: BLK) formed an alliance that offers commission-free trades on a slew of iShares funds after Charles Schwab (NYSE: SCHW) announced its ETF OneSource Platform.

Fidelity has more than doubled the number of commission-free iShares ETFs traded on the Fidelity brokerage platform to 65 from 30. The new alliance was announced after Charles Schwab implemented its new ETF OneSource platform, which allows clients to buy and sell 105 ETFs free of online trade commissions.

The increased competition among online brokerages reveals a growing trend of lowering fees, with the ETF price war pushing expense ratios near zero. Ultimately, advisors and investors benefit from the lower costs to trading ETFs.

Nevertheless, the Fidelity/BlackRock deal seems to highlight Fidelity’s strength in actively managed financial products, and BlackRock’s expertise in index-based, passive ETFs.

The deeper relationship will provide Fidelity with its foot into the ETF door and allow BlackRock to utilize a vast distribution channel. The partnership is described as a “long-term strategic alliance that provides extensive collaboration across Fidelity’s distribution and asset management organizations with BlackRock and its leading ETF provider, iShares,” according to a press release. However, the closer relationship has a lot of moving parts.

The new Fidelity-iShares agreement effectively extends a three-year-old contract between the firms that was set to expire. BlackRock’s iShares couldn’t have joined Schwab’s OneSource ETF platform for commission-free trades due to its existing and exclusive arrangement with Fidelity. Additionally, Schwab does not plan on adding any more ETF providers to the platform for at least a year. However, from what I have gathered, existing fund providers on Schwab’s platform can add more ETFs if they choose.

The Caveat
Some financial advisors, though, are upset over fees they will pay if they want to sell iShares ETFs they've held less than two months. Fidelity is charging an additional $7.95 per trade to investors who sell the ETFs within 30 days and to financial advisers who sell within 60 days.

Moreover, some have noticed that Fidelity replaced 10 of the commission-free iShares ETFs from its original list. Nine of which have lower trading volumes, which suggests that the ETFs are less popular with investors.

Nevertheless, Fidelity executives argue that the redemption fees are “prudent,” claiming that most advisors don’t sell ETFs within a 60-day timeframe.

Sector ETFs In The Works?
Fidelity also stated that the relationship will help the firm’s “future passive sector investment management efforts.” The money manager is known for its actively managed sector mutual fund and could be expanding into a family of actively managed ETFs based on its sector mutual funds after hiring State Street ETF executive Tony Rochte and filing with the SEC for exemptive relief for actively managed ETFs.

According to The Wall Street Journal, Fidelity does not want to venture into the passive ETF space with another “me-too” product.

Fidelity currently manages one ETF, Fidelity Nasdaq Composite Index (ONEQ).

Fidelity Accounts And 401(k)s
Lastly, the partnership will also allow Fidelity to expand its managed account offerings with new products using iShares ETFs as the underlying investments. The firm will create a suite of managed accounts using “tactical ETF strategies.”

Moreover, the new deal could push more employers to work with Fidelity in including a self-directed brokerage option within their plans. The commission-free iShares ETFs could make self-directed brokerage accounts more attractive for retirement investors.

Fidelity is the largest 401(k) plan administration firm, accounting for 27 percent of the U.S. 401(k) market. While the firm claims that 38 percent of its 401(k) participants can take advantage of self-directed 401(k)s, less than 3 percent actually do so.

Self-directed 401(k)s have been growing in popularity as investors research low-cost options to replace costlier mutual fund holdings. Last year, the U.S. Department of Labor enacted a mandate that requires employers to provide more extensive fee information on 401(k) plans, which led to rising interest in low-cost alternatives like ETFs. The new partnership would help bring low-cost iShares ETFs to Fidelity’s distribution channels. Consequently, 401(k) participants could benefit from the lower fees and greater options in managing their own retirement accounts.