Fidelity Hints It May Get Into ETFs

Editor's note: Updated from Jan. 13, 2009

NEW YORK (TheStreet) -- Mutual fund giant Fidelity Investments has given early indications that it could enter the $1 trillion dollar ETF industry with its own set of proprietary funds.

Following in the footsteps of asset managers like Schwab(SCHW), PIMCO, State Street(STT) and Blackrock(BLK), Fidelity's new funds could help to expand its audience and create a "stickier" customer base.

The recent announcement coincided with the retirement of Rodger Lawson, Fidelity's second-highest ranking executive. Lawson, who will be leaving the firm at the end of March, recently noted that the firm may consider opening actively managed ETFs modeled after its sector mutual funds, known as the Fidelity Select funds.

While the timing of Lawson's announcement may be surprising, the ETF industry is becoming an increasingly popular destination for large asset managers. In an article earlier this month, I suggested that Fidelity was "late to the ETF game."

However, as investors shift assets from traditional mutual funds into lower-cost ETF models, Fidelity's hesitancy is costing the firm. Since 2007, iShares, recently acquired by Blackrock, has gained more than $126 billion in assets. Fidelity, according to the Wall Street Journal, lost more than $15 billion in assets during that period.

Vanguard, whose low-cost, copy-cat ETFs continue to pique investor interest, nearly doubled net ETF assets in 2009. According to data from the National Stock Exchange, Vanguard's ETF assets doubled from $45 billion in December 2008 to $91.5 billion in December 2009.

Newcomer Schwab netted $348 million in ETF assets in less than two months, after launching its first proprietary ETFs in November 2009. Like Vanguard, many of Schwab's first funds took aim at traditional mutual fund themes. Among the funds launched in November are the Schwab Large Cap Growth ETF(SCHG) and the Schwab Large Cap Value ETF(SCHV).

Interest in ETFs heightened as confidence in traditional fund managers waned in the wake of the financial crisis. Traditional arguments for the mutual fund model are no longer resonating with investors unsatisfied with underperformance, especially as innovative ETFs encroach on mutual fund territory.

While traditional, passive, cap-weighted ETFs like SPDR S&P 500(SPY) and iShares MSCI Emerging Markets(EEM) still dominate the list of largest ETFs, issuers are coming up with new ways to beat benchmarks, and not just track them.