Fidelity Plans Head-First Dive Into ETFs


(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 company’s ability to offer more types of funds, in terms of asset classes, geography and fund structures.

In an interesting twist, the filing asks for permission to create a “master-feeder” structure, whereby 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 its existing index funds. Vanguard has a patent on its “share class” structure.

Fidelity spokeswoman Sophie Launay declined to elaborate on whether the master feeder structure described in yesterday’s 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 Fidelity’s first order.

“We are always looking for new ways to serve our clients,” 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 Launay’s 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 months— and sometimes longer—from the date of the initial filing for a company’s first ETF to hit the market.

Arrangement With iShares Unchanged

Boston-based Fidelity’s brokerage arm was notable last year for launching the first “commission free” ETF trading platform for 30 ETFs sponsored by iShares, the world’s biggest ETF company.

Fidelity’s Launay stressed that yesterday’s filing wouldn’t affect that agreement.

“The filing does not change in any way our arrangement with iShares,” 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 assets.



Playing Catch-up

Fidelity’s 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 own right.

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 “Ned” Johnson III. Crucially, however, Johnson’s criticism was leveled at indexing per se as an investment philosophy, rather than on index ETFs.

Bogle, a pioneer of indexing, couldn’t disagree more with the rants of a righteous active investor, but both men, for their own reasons, surely kept their respective companies from quickly embracing ETFs.

But as Bogle has kept railing against the dangers of trading ETFs too much—even in retirement—Vanguard kept true to its founder’s “cost matters” hypothesis and, by dint of its ultralow-cost funds, has become a huge ETF sponsor.

“Another company’s entry in the ETF market won’t alter what we do, which is offer low-cost, benchmark-hugging and easy-to-understand ETFs,” Rebecca Katz, a public relations official at Valley Forge, Pa.-based Vanguard told IndexUniverse in a voicemail message.

It’s not clear whether Fidelity is willing to compete on price.

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, you’ve got to believe Fidelity’s thinking long and hard about pricing as it seeks to expand its ETF footprint.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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