Why Fidelity and Schwab Restrict Trading of Non-Proprietary Money Market ETFs

Most investors don’t realize that idle cash is one of the biggest profit centers for major brokerages. According to a Bloomberg report, both Fidelity and Charles Schwab have stopped allowing new purchases of certain money market ETFs—specifically those offered by BlackRock and Texas Capital. While these brokerages cite “operational reasons,” the move conveniently keeps client cash within their own branded products, where they earn higher spreads. The situation highlights a long-standing tension in the brokerage world: the quiet battle over who profits from investors’ uninvested dollars. For savvy investors, understanding where your cash sits—and how it’s being monetized—is as important as the investments themselves.

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.

The inflows to those new ETFs weren’t even that big, making this an interesting development:

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.

Indeed, I hope this doesn’t start a trend of more bans of competitor ETFs. Fidelity and Blackrock have worked very closely together in the past, so this is probably rather awkward.

For now, I still own lots of shares of iShares 0-3 Month Treasury Bond ETF (SGOV) and probably soon Vanguard 0-3 Month Treasury Bill ETF (VBIL). Fidelity and Schwab haven’t banned those, yet. Of course, Vanguard continues to not play funny games with their money market sweep funds. C’mon Vanguard, time for your own money market ETF to create even more tension…

I know that these brokers have to make their money somewhere, but they may have to become more transparent about it soon.