Fidelity Investments is entering the ETF share class arena for the first time, adding exchange-traded fund versions of three established mutual fund strategies to its lineup.
The Boston-based asset manager announced the launch of the Fidelity Intermediate Municipal Income ETF (FIMU), the Fidelity Real Estate Income ETF (FREI), and the Fidelity Short-Term Bond ETF (FSTB) – each a share class of an existing mutual fund rather than a standalone product.
The move marks a significant step for one of the country's largest asset managers and signals the broader normalization of a structure that, until recently, only one firm was authorized to use.
"We are at an inflection point in the ETF industry, with exemptive relief providing the opportunity to offer additional product choice for investors," said Greg Friedman, head of ETFs at Fidelity Investments in Boston, as he highlighted the strategies' "long-term historical performance" and the "experienced portfolio management teams" running them.
By adding an ETF share class to a mutual fund, asset managers can offer both traditional and exchange-traded versions of the same strategy under one portfolio umbrella, sharing the same assets, track record, and investment management team. Compared to mutual funds where NAV is settled after the market close, the ETF wrapper adds intraday trading, potential tax efficiency through the in-kind creation and redemption mechanism, and – in many cases – lower expense ratios.
Clients who currently hold shares of the existing Fidelity mutual funds on the company's platform will have the option to convert their holdings to the ETF share class on a recurring, non-taxable basis, according to Fidelity's announcement.
The three new products set to list on the Nasdaq on Thursday will come with competitive expense ratios. FIMU carries an estimated net expense ratio of 0.30%, FREI comes in at 0.57%, and FSTB – the short-term bond strategy managed by co-portfolio managers Dave DeBiase, Robert Galusza, and John Mistovich, who bring a combined 89 years of experience – will charge 0.20% on a net basis.
The Fidelity Intermediate Municipal Income fund is managed by co-portfolio managers Cormac Cullen, Michael Maka, and Elizah McLaughlin, with a combined 26 years of experience. Meanwhile, the real estate strategy is run by Bill Maclay, a 27-year veteran of the sector.
For decades, Vanguard was the only firm permitted to run ETF share classes within mutual funds, protected by a patent that expired in May 2023. After that, nearly 80 fund managers filed petitions with the U.S. Securities and Exchange Commission (SEC) for exemptive relief to add ETF share classes of their own, according to ISS Market Intelligence.
The SEC's September decision to approve Dimensional Fund Advisors' application – the first such approval for an actively managed strategy – effectively became the starting pistol for other asset managers to take their own shots at the opportunity.
The managers who followed Dimensional's original 2023 filing represent more than half of the active mutual fund market – approximately $8.5 trillion in assets as of August last year, according to one note by ISS Market Intelligence. A November analysis by Brown Brothers Harriman found that following the SEC's indication of approval, more than 60 sponsors re-filed share class relief applications.
According to a 2024 survey by ISS Market Intelligence, 60% of advisors said they would prefer to access a favored manager in ETF form, versus just 15% who would opt for a mutual fund. A separate BBH global investor survey in March found that 86% of U.S. respondents said they would buy an ETF share class of a mutual fund if given the choice.
Citing internal data, Fidelity said 53% of advisors' portfolios included ETFs as of the fourth quarter of 2024, up from 44% the prior year. The share class launches would expand Fidelity's shelf to include 84 ETFs and exchange-traded products with $172 billion in assets under management, the firm said.
BBH's analysis highlighted that dealer platforms are already examining how multi-share class structures interact with Regulation Best Interest, which requires broker-dealers to act in the best interest of clients when recommending investments. If a lower-cost ETF share class of the same strategy sits alongside a higher-cost mutual fund share class, advisors and their firms face added scrutiny over which vehicle they recommend and why.
ISS Market Intelligence also flagged the issue of capacity management. Unlike mutual funds, ETFs cannot be closed to new investors – a tool managers sometimes use to protect strategy performance in less liquid asset classes. That makes the structure a poor fit for highly concentrated strategies or those investing in smaller-cap equities or certain fixed income segments.
When a mutual fund investor wants to move holdings into the ETF share class, there is currently no industrywide standard for how platforms handle those transactions, according to BBH. That means sponsors, dealer platforms, and administrators will need to develop consistent processes before conversions can be executed efficiently at scale.
“Fidelity remains committed to delivering innovation and exceptional value to our customers," Friedman said.
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