(Updated with comments from Fidelity and Vanguard spokeswomen
and with details throughout.)
Financial services giant Fidelity Investments filed papers with
the Securities and Exchange Commission on Dec. 1, laying the
groundwork for the company to expand its limited presence in the
world of exchange-traded funds.
The company, which currently markets just one ETF, is now
seeking to offer equity and fixed-income ETFs, covering U.S. as
well as international markets. The filing it submitted to the SEC
only contemplates index-based investments, although it is broad
enough to permit 130/30 funds and other long-short products.
Many have wondered when the Boston-based company, which is one
of the largest managers of mutual fund assets in the world, would
make an aggressive push into ETFs. Its only ETF is the Fidelity
Nasdaq Composite Index Tracking ETF (NYSEArca:ONEQ). The ETF
launched in September 2003, and has $155.7 million in assets.
A company official told IndexUniverse that the filing went well
beyond what Fidelity requested from the SEC nearly a decade ago,
and will extend the companyâs ability to offer more types of
funds, in terms of asset classes, geography and fund
In an interesting twist, the filing asks for permission to
create a âmaster-feederâ structure, whereby ETFs would invest
solely in a âmaster fundâ portfolio. That portfolio, in turn,
could serve as the basis for other ETFs as well as other investment
vehicles, such as traditional mutual funds.
Itâs unclear how close this comes to replicating Vanguardâs
approach to the ETF market, whereby Vanguard ETFs exist as share
classes of its existing index funds. Vanguard has a patent on its
âshare classâ structure.
Fidelity spokeswoman Sophie Launay declined to elaborate on
whether the master feeder structure described in yesterdayâs
filing would resemble the Vanguard structure or that of any other
ETF provider. But she did note that the filing was prompted by the
fact that the SEC has granted much broader exemptive relief in the
years since it granted Fidelityâs first order.
âWe are always looking for new ways to serve our clients,â
Launay said, saying the exemptive relief it is seeking in the
latest filing would help it do so.
Companies typically cannot comment on the contents of a
regulatory filing before it has been evaluated by regulators, so
Launayâs reticence is hardly noteworthy.
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 monthsâ and
sometimes longerâfrom the date of the initial filing for a
companyâs first ETF to hit the market.
Arrangement With iShares Unchanged
Boston-based Fidelityâs brokerage arm was notable last year
for launching the first âcommission freeâ ETF trading platform
for 30 ETFs sponsored by iShares, the worldâs biggest ETF
Fidelityâs Launay stressed that yesterdayâs filing
wouldnât affect that agreement.
âThe filing does not change in any way our arrangement with
iShares,â Launay said.
The commission-free trading that has spread through the world of
ETFs speaks to the lengths to which companies are going these days
to capture new clients via ETFs.
Almost $1.065 trillion is now invested in U.S.-listed ETFs,
according to data compiled by IndexUniverse. The first U.S.
exchange-traded fund, the SPDR S'P 500 ETF (NYSEArca:SPY), was
launched in January 1993, and now has just shy of $90 billion in
Fidelityâs deal with iShares was viewed by some in the money
management industry as a sign of too little, too late. After all,
rival mutual fund company Vanguard jumped into the ETF space around
the same time that Fidelity rolled out ONEQ.
In the intervening years, Vanguard has become the third-biggest
U.S. ETF sponsor, behind San Francisco-based iShares and
Boston-based State Street Global Advisors.
At the end of November, iShares had ETF assets totaling $444.71
billion, while SSgA had $264.55 billion and Vanguard had $173.37
billion, according to data compiled by IndexUniverse.
Vanguard in many ways was a latecomer to the ETF industry in its
Its founder John Bogle has never quite warmed up to ETFs, saying
the fact that ETF investors can and do trade them more than once a
day is terribly deleterious to returns.
Fidelity has had its own Bogle slowing down a move into ETFs in
its Chief Executive Edward âNedâ Johnson III. Crucially,
however, Johnsonâs criticism was leveled at indexing per se as an
investment philosophy, rather than on index ETFs.
Bogle, a pioneer of indexing, couldnât disagree more with the
rants of a righteous active investor, but both men, for their own
reasons, surely kept their respective companies from quickly
But as Bogle has kept railing against the dangers of trading
ETFs too muchâeven in retirementâVanguard kept true to its
founderâs âcost mattersâ hypothesis and, by dint of its
ultralow-cost funds, has become a huge ETF sponsor.
âAnother companyâs entry in the ETF market wonât alter
what we do, which is offer low-cost, benchmark-hugging and
easy-to-understand ETFs,â Rebecca Katz, a public relations
official at Valley Forge, Pa.-based Vanguard told IndexUniverse in
a voicemail message.
Itâs not clear whether Fidelity is willing to compete on
But when one considers that it would take owners of the Vanguard
S'P 500 ETF (NYSEArca:VOO) 15-plus years of paying their
6-basis-point annual expense ratio to equal the 92 basis points
that investors in the Fidelity Contrafund (FCNTX) pay in a single
year, youâve got to believe Fidelityâs thinking long and hard
about pricing as it seeks to expand its ETF footprint.
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