Fidelity, Schwab block clients from buying BlackRock and Texas Capital ETFs

Fidelity Investments and Charles Schwab Corp. are prohibiting clients from investing in money-market ETFs on their trading platforms, an unusual move for the financial powerhouses who typically permit easy access to funds that already trade on an exchange.

The two firms are blocking purchases of three exchange-traded funds offered by BlackRock Inc. and Texas Capital, the first to track money-market securities such as Treasury bills and other government-backed debt in an ETF structure. 

The new funds serve as a direct challenge to mutual-fund providers, who have long been big, established players in money-market products. Fidelity and Schwab alone manage trillions of dollars in money-market assets, and this month, Schwab filed plans to launch its own government money-market ETF.

A Schwab spokesperson said its decision is consistent with the firm’s “long-standing approach” of only making available Schwab affiliate money-market mutual funds, while a Fidelity spokesperson said this is an extension of the company’s policy to “generally restrict” third-party money-market mutual funds.

Yet, the move stands out because trading platforms like Schwab and Fidelity typically don’t restrict exchange-traded funds, even if those funds are in competition with existing in-house offerings. 

“I’ve never seen this with any other ETFs,” said Mike Younkman, CIO at Ankerstar Wealth, a firm with roughly $110 million in assets under management, who had been investing in Texas Capital’s MMKT for his advisory clients, and was “disappointed that earlier this year, it went into a sell-only mode with Schwab, likely because they’re having a competitor product.”

Younkman’s firm sold out of his MMKT position due to the platform ban, and instead shifted client assets back into the short-term bond ETF he held before money-market ETFs began trading. He said the move caused some operational headaches but shouldn’t ultimately weigh on investor returns.

The restriction underscores how the growth of the ETF and race to put even more novel strategies into the fund is creating more competition throughout the asset management world and introducing wrinkles for issuers seeking to distribute funds. 

Under the banner of democratizing access to strategies through the tax-efficient vehicle, ETF issuers have managed to list their offerings with relative ease on both Fidelity and Schwab, which are two of the largest brokerage firms in the US. The ease of listing is changing, though, as ETFs grow. Last year, Fidelity imposed new fees on some ETF firms, in return for listing and maintaining the products on its massive platform. The latest move has taken some investors by surprise.

“It was pretty shocking to have them come out and say you can’t buy this anymore,” said Jeremy Ingram, CEO and CIO at Beacon Harbor Wealth Advisors, who had invested in MMKT for his advisory clients. “It’s not like some exotic investment — it’s a money market.”

Texas Capital in a statement said “it is unfortunate and surprising that Schwab and Fidelity would restrict their clients’ ability to purchase MMKT,” adding the fund “remains an important tool for investors to manage their cash, one we believe should be available in the same way that investors can purchase any NYSE-listed security.” 

A BlackRock spokesperson noted that the firm’s iShares money-market ETFs “unlock access to professional grade cash management strategies in the convenience of the ETF wrapper, providing additional choice and flexibility for investors.” 

Investors have flocked to money markets over the last several years, in large part due to the Federal Reserve’s aggressive rate-hiking cycle that sent short-term rates above 5%. While the US central bank has begun to ease monetary policy, these rates are still high enough to keep pulling cash toward money-market funds, which saw their assets rise to an all-time high of more than $7 trillion recently. 

Fed policymakers left their key benchmark rate unchanged for a second straight meeting last week, with Chair Jerome Powell indicating the central bank isn’t in a hurry to adjust borrowing costs amid economic uncertainty.

Fidelity has roughly $1.5 trillion in registered money-market fund assets under management, while Schwab is home to about $650 billion. 

Texas Capital’s fund was the first ETF to follow the so-called Rule 2a-7 — a provision of a 1940s Securities and Exchange Commission law that governs money-market funds. In February, BlackRock followed up by launching its Government Money Market ETF and Prime Money Market ETF. The ETFs aren’t required to maintain a stable net asset value of $1, meaning investors can be exposed to some downside risk. 

Texas Capital’s fund has seen relatively little inflows this year, after pulling in about $40 million last year. BlackRock’s prime money-market fund has taken in roughly $43 million in inflows since launching in February. Its government offering has taken in a net $8 million.