Fidelity: 'No plans' to expand ETFs

Even as ETFs continue to take market share away from mutual funds and gain more popularity with retail investors and advisers, officials for Fidelity Investments are maintaining that the fund giant is unlikely to expand its proprietary exchange traded fund lineup.
AUG 21, 2009
By  Sue Asci
Even as ETFs continue to take market share away from mutual funds and gain more popularity with retail investors and advisers, officials for Fidelity Investments are maintaining that the fund giant is unlikely to expand its proprietary exchange traded fund lineup. “We have no current plans to expand proprietary ETFs,” Fidelity spokesman Vin Loporchio said shortly after the firm's president, Rodger Lawson, said in published reports that the company did not make a run at iShares earlier this year while the ETF behemoth was for sale. Fidelity is forgoing a growing market segment: Investors bought more ETFs in the first half of this year than in the same time period in 2008, according to Strategic Insight Mutual Fund Research and Consulting LLC of New York. In the first six months of 2009, ETFs had net inflows of $35 billion, compared with $26 billion in the first half of 2008, Strategic Insight reported. At the same time, investors pulled $49 billion more out of mutual funds than they put in. And assets in the $550 billion ETF sector are expected to surpass $1 trillion in less than three years, according to a recent report from Strategic Insights. While ETFs theoretically represent a competitive threat to Fidelity, the company is well-positioned to live without them, said Matthew Noll, senior credit officer at Moody's Investors Service of New York. “The diversification benefit of Fidelity's brokerage platform, to a small degree, mitigates the competitive threat because they distribute these products and receive brokerage revenues and distribution fees for the distribution of ETFs,” he said. Fidelity offers the Fidelity Nasdaq Composite Index Tracking Stock (ONEQ) which tracks the Nasdaq, and hundreds of other providers' ETFs on its platform. The decision not to take the leap into the ETF market is not a surprise, said John Bonnanzio, editor of the Fidelity Insight newsletter, which is based in Wellesley Hills, Mass. “They have had more than enough time to make a decision to get into that business,” he said. “I think what they have decided is that they don't want to compete with themselves in that way.” Fidelity recognizes that continued growth will come from the performance of its actively managed lineup, he said. In fact, Fidelity this week reported that its mutual funds had outperformed 75% of their peers year-to-date through June 30, citing data from Morningstar Inc. of Chicago and the New York-based research firm Lipper Inc. The performance represented a turnaround from last year, when only 56% of its funds outperformed their peers for the entire year, Fidelity officials noted. Fidelity's equity funds in particular posted an improvement in performance. Through June 30, the firm's stock funds had beaten 64% of their peers, up from last year when the funds beat only 36%, Fidelity reported. In addition, 70% of Fidelity's stock funds are beating their benchmarks year-to-date through July 31 and 83% of its sector funds are beating their benchmarks, the firm reported. “The way to make their mark is by coming up with top-tier funds as far as performance,” Mr. Bonnanzio said. “But I'm sure Fidelity recognizes that half of a year is not a full data point.” “Our three- and five-year performance numbers are rising as well,” Mr. Loporchio said. “In the past four years we have continued to build out and enhance our investment organization, and in particular, the equity research capabilities. We think we are well-positioned for growth.”

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