While ETF assets have surged over the past five years, nearly tripling, Fidelity has watched assets in their actively managed stock mutual funds shrink 16% and corporate profits shrivel up. We hate to say “we told you so”, but back in 2009, we explained why Fidelity had better move quickly to avoid “getting their lunch eaten by the ETF competition”. Even then, it was clear that investors were quickly gravitating to low cost, tax efficient, and transparent ETFs. Furthermore, investors were becoming acutely aware of the underperformance of active mutual fund managers, which is where Fidelity butters its bread. At the time, Fidelity was concerned that lower cost ETFs might cannibalize their lucrative actively managed mutual fund business. Remember, actively managed mutual funds are typically significantly more expensive than ETFs – which means more of your money in the pockets of mutual fund companies instead of your investment accounts. Quite simply, Fidelity was content to watch what has been called “the next generation mutual fund” leave the train station without them.
Fast forward to today and, as they say, “better late than never”. After essentially standing on the sidelines for the better part of a decade, Fidelity is finally making their first real push into ETFs. They did launch a single ETF (ticker ONEQ) some ten years ago, but this was really a token entry into the ETF market with no real corporate ETF strategy in place. Today, Fidelity is making a concerted effort to play catch-up with the launch of 10, passively managed sector ETFs. What’s particularly interesting about this initial lineup of ETFs is that they’re undercutting similar sector ETFs from low cost leader Vanguard. In other words, Fidelity is not just quietly entering the ETF business – they’re going for the jugular. It’s also noteworthy that Fidelity already offers one of the largest lineups of sector mutual funds, including 44 that are actively managed. That means there’s a pretty good chance that Fidelity does, in fact, cannibalize its own business. The fact that they’re willing to do so makes a pretty strong statement about their belief in the future of ETFs.
So what are the takeaways for investors? 1) One of the world’s largest, most well-known mutual fund companies is making an aggressive push into ETFs. That should tell you something about where the future of the investment industry lies. We won’t go so far as to say mutual funds will become obsolete, as some prominent industry professionals have, but there’s no denying the massive trends in play here. 2) Investors are driving this change. They’re voting with their own money and they want low cost, passively managed products – not expensive, underperforming ones. Ultimately, companies have to listen to the consumer. In some regards, Fidelity is fortunate that they still have an opportunity to “catch the train” after basically ignoring obvious consumer trends. 3) If you’re not at least considering investing ETFs, it’s time to ask why. Mutual fund companies Vanguard, PIMCO, and now Fidelity are all aggressively involved in ETFs. Charles Schwab launched a full ETF platform. Times have changed and technology evolves, even in the investment business. While mutual funds may have been the past, ETFs appear to be the future. A future that Fidelity is now betting heavily on.
