Fidelity Investments, still firmly in the public's imagination
as the ultimate success story in the world of actively managed
mutual funds, filed regulatory paperwork detailing plans to bring
to market active
, adding to its previously disclosed aim to launch index ETF
In the exemptive relief filing, the Boston-based company that
still only has one ETF to its name, said the first active fund it
is contemplating is the Fidelity Corporate Bond ETF, a security
seeking "a high level of current income" that will invest at least
80 percent of its assets in investment-grade U.S. and foreign
The paperwork, filed on Friday, Dec. 7, follows by almost
exactly one year a separate exemptive relief filing the company
submitted to the Securities and Exchange Commission requesting
broad permission to market index ETFs. Together the two filings
provide a clear signal that Fidelity's move into the vibrant world
of exchange-traded funds is broad and ambitious.
The company behind the legendary Fidelity Magellan Fund and the
Fidelity Contrafund further signaled its newfound seriousness
earlier this year when it named longtime ETF industry veteran Tony
Rochte to head up a new ETF operation called SelectCo.
Rochte had been a managing editor at Boston-based State Street
Global Advisors, the No. 2 U.S. ETF company by assets after San
Francisco-based iShares, the unit of BlackRock.
Did Fidelity Miss Out?
As things stand, the company has only one exchange-traded fund,
the Fidelity Nasdaq Composite Tracking Stock ETF (NasdaqGM:ONEQ),
which it rolled out in September 2003 and which has about $175
million in assets.
That launch was arguably quite timely, as rival fund
companies-including the now-No. 3 ETF company The Vanguard
Group-were barely yet in the business of marketing ETFs
But because Fidelity never followed ONEQ's launch with rollouts
of any other strategies, the company is now widely perceived as
having missed out on the early phase of ETF development.
Total U.S.-listed ETF assets reached a record $1.319 trillion on
Friday, Dec. 7, even though fund rollouts have slowed in 2012, and
fund closures have accelerated.
Many analysts think the ETF industry is on the cusp of another
significant leg up in asset-gathering that will be predicated on
penetrating the huge 401(k) retirement market, the infrastructure
of which is for the most part designed around the mutual fund.
Whether Fidelity is well positioned to exploit the 401(k) market
should it open up to ETFs remains to be seen.
Vanguard-esque Fund Structures?
Fidelity's two filings detailing plans for both index and active
ETFs each contain the same noteworthy twist; namely, that the
company plans to make use of a "master-feeder" structure on both
types of funds.
Under such a structure, its ETFs would invest solely in a
"master fund" portfolio. That portfolio, in turn, could serve as
the basis for other ETFs as well as other investment vehicles, such
as traditional mutual funds.
It's unclear how close this comes to replicating Vanguard's
approach to the ETF market, whereby Vanguard ETFs exist as share
classes of their existing index funds. Vanguard has a patent on its
"share class" structure.
Fidelity declined to comment on the master-feeder structure when
we asked about it a year ago, which is hardly a surprise since
companies typically cannot comment on the contents of regulatory
filings until they have been evaluated by regulators.
Derivatives Green Light
The latest filing outlining active ETFs appeared to contain
language suggesting that active funds Fidelity will roll out will
be able to use derivatives as part of their overall investment
That's significant because the SEC made clear last week it would
no longer put the freeze on requests to implement derivatives use
in active funds following a 2-1/2 year review on the use of
derivatives in active as well as leveraged and inverse funds.
However, the commission didn't lift the restriction on leveraged
and inverse funds that was first imposed in March 2010.
Exemptive relief grants ETF firms exception to sections of the
Investment Act of 1940 and is just the first step in the path to
launching ETFs. It often takes at least six to 12 months from the
date of the initial filing for a company's first ETF to hit the
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