Fidelity is making its first big leap into the exchange-traded fund space on Thursday with the launch of 10 sector ETFs, but the question remains: Is it too little, too late? Several analysts are saying, “No.”
“ETFs still have a long way to go before they catch up to mutual funds, and there's still room for entrants,” said Mike Rawson, an analyst at Morningstar Inc. “I think we should wait a few years to see what else Fidelity is able to do.”
Ten years ago, Fidelity launched its first and only ETF: the $262 million Fidelity Nasdaq Composite Tracking ETF. Since then, it has largely missed out on the ETF boom. Total assets in the ETF market have increased to $1.6 trillion this year, from $125 billion in 2003, making Fidelity's share of the market a mere sliver, according to data from BlackRock Inc., the largest ETF manager.
“They haven't had a clear ETF strategy and they haven't pursued it (as) aggressively as they should have,” Mr. Rawson said. “Even though (ETFs) are small in relation to the mutual fund market, their flows are large.”
Fidelity has every reason for wanting to dive into the ETF market. Since 2008, Fidelity's active U.S. equity funds have suffered $87 billion in net outflows, according to data from Morningstar. By contrast, the company's passively managed index funds have had positive net inflows of $15 billion since 2008.
The Boston-based firm faces heavy competition. There now are more than 1,500 ETFs, up from fewer than 150 10 years ago. And the number of companies launching them has grown to 58, from fewer than 10 in 2003, according to BlackRock.
The delay, however, has allowed Fidelity to enter at a time when it can be competitive on costs. Fidelity's 10 sector ETFS will charge 12 basis points in management fees, according to a filing with the Securities and Exchange Commission. That's just shy of the 14 basis points The Vanguard Group Inc. charges on its sector ETFs, which were the cheapest available.
State Street Global Advisors, which manages the largest suite of sector ETFs, charges 18 basis points.
“Expenses are definitely something that we want to be cognizant of,” Andrew Wang, senior vice president of Runnymede Capital Management, said of the new Fidelity funds. “I'm certainly going to take a look at them.”
Morningstar's Mr. Rawson said Fidelity's strong brand name, established brokerage platform and numerous managers are key factors working in the firm's favor with the launch of the new ETFs. The company is not taking the new venture lightly and is investing heavily to make up for its lost ground.
“I think they view this as a very serious strategy,” he said. “They have very competitive index products. It would only make sense for them to have ETFs to go along with that.”
Citing regulatory restrictions ahead of the launch, a Fidelity spokeswoman declined to comment.