The launch of Fidelity Investment’s passive US sector exchange traded funds (ETFs) is a huge step forward for the asset management firm, according to two industry experts.
Fidelity’s move is an interesting one because until now it is resisted making a big push into this growing industry, having launched its first and only ETF ten years ago.
Deborah Fuhr, partner and co-founder of research and consultancy firm ETFGI, said: "Fidelity's new suite of ETFs is a significant development for them, the industry and investors. Fidelity has a strong global brand and global distribution covering institutional investors, financial advisors and retail investors.
"This will allow them to offer their own ETFs on their on-line platforms where they have been historically offering other providers ETFs on their platforms in the US and the UK."
Todd Rosenbluth, director of ETF research at S&P Capital IQ, agreed that the move is good for both Fidelity and the ETF industry:
“While a new entrant into the crowded but growing ETF market hardly warrants headlines, we think Fidelity's strong asset management and self-directed portal brand will contribute to these ETFs impacting the financial services landscape in a number of ways.”
The most obvious advantage is the low cost of investing in the new funds which have an expense ratio of just 1.12%. This ratio is lower than for ETFs provided by the likes of iShares, First Trust, State Street and Vanguard.
Rosenbluth said this would appeal to investors looking for “low-cost, transparent ways to add a tactical slant to their portfolios.”
Long-established ETF providers may well have to watch out for this emerging provider.
“Fidelity might take some share away from these larger ETF providers,” said Rosenbluth. However he said it poses opportunities and challenges for Fidelity and the other providers.
He went on to say: “While expense ratios are important for investors to consider, we still think State Street's Consumer Discretionary Sector SPDR (XLY 62 Overweight) will remain the industry leader in assets for years to come as it offers significant liquidity and typically trades at an extremely low bid/ask spread of $0.01, compared to similar sector products. Time will tell if Fidelity can match that.”
Rosenbluth also believes the launch will help some of iShares products that have gained investor interest partly because they are commission free on Fidelity’s platforms.
“For investors who want to use ETFs for both the "core" and the "satellite" portions of their asset allocation, iShares has a suite of products that are both low cost and hold attractive holdings, in our opinion.
"If Fidelity investors want to today increase their cyclical exposure to the S&P 500 Index, they could choose both iShares Core S&P 500 (IVV 176 Overweight) and FDIS and then in the coming months become more defensive by reducing FDIS and adding FUTY without any commissions. This could also be done with mid-cap ETFs such as iShares Core S&P Mid Cap (IJH 129 Overweight) or others in iShares Core Series.”
It is particularly good timing for Fidelity to enter the industry given that investors have poured $26.6bn of new money into US sector ETFs, according to BlackRock’s figures. Sector products have taken in 20% of inflows so far this year even though these funds comprise just 12% of the exchange traded product market. Financials and technology have had particularly strong inflows of more than $5bn each.