Fidelity introduces $100 service fee for select ETFs, raising industry concerns

Fidelity introduces $100 ETF service fee, posing a significant threat to select funds' accessibility and investor behavior.

By Barry Stearns

4/3, 13:56 EDT

Key Takeaway

  • Fidelity introduces a $100 service fee for ETFs not in a maintenance arrangement, affecting select funds and raising industry concerns.
  • Rayliant plans to absorb the new fee for its ETFs, including RAYD with a 12% gain this year, to avoid investor charges.
  • The move could influence other brokerages and highlights the practice of support agreements between fund managers and platforms.

Fidelity's New Fee Structure

Fidelity Investments is introducing a new service fee that will affect a select group of exchange-traded funds (ETFs) on its brokerage platform. This fee, set to take effect in early June, involves a $100 servicing charge for buy orders of ETFs that do not participate in a maintenance arrangement with Fidelity. The charge is aimed at ETFs issued by firms on Fidelity’s surcharge-eligible list, which may be updated periodically. This development has raised concerns among some asset managers about the potential impact on investor behavior and fund accessibility.

Jason Hsu, founder of Rayliant, which offers actively-managed ETFs and is included on the surcharge-eligible list, described the fee as an “existential” threat. He expressed concern that the fee could significantly deter investors from purchasing ETFs subject to the charge, potentially leading to a decline in fund viability. Hsu suggested that the sensible path for ETF managers would be to absorb the cost of Fidelity’s maintenance fee to avoid passing the $100 service charge onto investors.

Rayliant's Response and Performance

In response to Fidelity’s new fee structure, Rayliant expects to pay the maintenance fee as a means to ensure its ETFs remain accessible to investors without the additional $100 service charge. Rayliant has launched three ETFs in recent years, all of which are available for purchase via Fidelity. These funds have shown varying degrees of performance, with the Rayliant Quantitative Developed Market Equity ETF (RAYD) gaining 12% this year, outperforming the S&P 500 index’s 9.1% gain over the same period. The ETF benefits from exposure to stocks in the U.S. and Japan and has a net expense ratio of 0.8%.

The Rayliant Quantamental China Equity ETF (RAYC) and the Rayliant Quantamental Emerging Market ex-China Equity ETF (RAYE) have also posted gains of 7.9% and 6.2%, respectively, in 2024. Both ETFs, which began trading in December 2021, have assets under management of around $46 million, while RAYC, listed a year earlier, has $37 million in assets.

Industry Implications

The introduction of Fidelity’s service fee and the decision by some ETF managers to absorb this cost highlight broader industry practices regarding support agreements. Such agreements, which involve fund managers paying fees to brokerage platforms for operational and technological support, are not new. They have been a part of the asset management industry for almost a decade for ETFs and even longer for mutual funds.

Fidelity’s move could set a precedent, with other brokerage firms potentially observing the outcome to determine whether to implement similar fees. Less than 0.5% of ETFs and mutual funds on Fidelity’s platform are affected by this new fee, underscoring its targeted nature. The fees paid by fund managers under support agreements are used to cover costs related to servicing operations and technology enhancements.

Management Quotes

  • Jason Hsu, founder of Rayliant:

    "If no one buys your ETF, you just die." "And to his thinking, that’s the 'sensible path,' as a $100 service fee would represent an 'enormous obstacle' for investors considering buying ETFs subject to that charge. Although a maintenance fee would eat into the revenue managers may get from having their funds on Fidelity brokerage platform, Rayliant expects to pay it as a kind of toll."