Editor's note: Updated from Jan. 13, 2009
NEW YORK (
) -- 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
, 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
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
took aim at traditional mutual fund themes. Among the funds launched in November are the
Schwab Large Cap Growth ETF
Schwab Large Cap Value ETF
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
iShares MSCI Emerging Markets
still dominate the list of largest ETFs, issuers are coming up with new ways to beat benchmarks, and not just track them.
The latest trend in ETF development, an area where Fidelity hopes to make its mark, is "actively managed" funds. Firms like T. Rowe Price and Putnam have both expressed interest in joining this segment of the ETF industry, despite the
for many early actively managed ETF models.
PIMCO's new actively managed ETF funds have managed to attract
noticeable investor attention
. Launched in November of 2009, the
PIMCO Enhanced Short Maturity Strategy Fund
has already netted $52 million in assets. The
PIMCO Intermediate Municipal Bond Strategy Fund
, also launched last November, has attracted $13 million in assets.
PIMCO, which joined the ETF industry in June of 2009, managed to net $470 million in ETF assets during
Innovative, low-cost products are the hallmark of the ETF industry, and Fidelity reluctance to launch its own products could continue to drive investors elsewhere. One of the more remarkable aspects of Schwab's proprietary ETF launch was the announcement that clients could trade the products
. By creating low-cost trading platforms that are one-stop-shops for a variety of financial products, firms like Schwab will continue to grab market share.
Fidelity's plan to launch proprietary ETFs is a logical addition to existing ETF tools as well as a logical extension of existing Fidelity Select Funds, which track individual market sectors. Fidelity currently offers ETF research on its website.
As ETFs become a more fundamental part of 401k planning, Fidelity's dominance among this group of investors could come under pressure if the firm doesn't develop the new funds expediently.
2010 could prove to be an interesting year for Fidelity, as both financial firms and investors grapple with the changed economic landscape. While the process of developing and launching successful ETFs is a challenge for any firm, it will be an obstacle that Fidelity has to overcome to stay relevant.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion does not have holdings in any of the funds mentioned.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.