Fidelity Capitulates

Dec 06, 2011

Recently, Fidelity announced that is has filed to offer a list of new ETFs.   There were some comments made about how Fidelity ETFs will be within a ‘master-feeder’ structure between the existing mutual funds and the new products.    Quite honestly, who cares?   We as investors don’t unless it’s something that is actually innovative from an investment perspective.   The only thing interesting about this news is the implied competitive duel that is going on in the industry --- as it is this competition that is helping us to pay no commissions and be charged expense ratios that are extremely low. 

The big rivalry in the mass-market U.S. brokerage industry is between the two clear top-tier firms:  Schwab and Fidelity.   TD Ameritrade is making great strides and arguably has one of the best combinations of a software platform and low-cost ETF options but TD Ameritrade is not really in the same class in terms of brand name and size as the first two.   Other large firms like Vanguard, American Funds and Franklin-Templeton are all in a slightly different sphere, in our opinion as their primary businesses are more clearly in-house managed mutual funds.  Fidelity grew to be more than just a mutual fund firm many years ago.   Internally at Schwab, Fidelity is enemy #1– not Vanguard or Ameritrade.

Schwab’s ETF offerings are still pretty weak -- nothing but U.S. growth and value ETFs and some no-frills broad international funds.    Yawn.   There isn’t much money in ETFs for anyone but the investor – which to us makes this all an even MORE interesting game to watch unfold.   Fees that come out of mutual fund and brokerage firms go directly into investors pockets.   The costs of investing are important.  Vanguard has been rolling over the mutual fund industry for years by intentionally passing the savings on to the investor and it’s all a very, very good thing. 

Vanguard was actually quite late to the game when it launched ETFs many years ago so the fact that Fidelity waited until December 2011 to capitulate on ETFs implies just how much kicking and screaming must have gone on inside Fidelity on this secular trend toward ETFs.   The trend is powerful and accelerating.  In both advisor managed portfolios and next in 401(k) plans, ETFs are clearly becoming the core building blocks of modern portfolios, a role traditionally split between individual stocks and mutual funds.

iShares – now a part of Blackrock was the firm that drove the industry forward.   If we had to pick a #2 it would be State Street (SPDR) --- but even they were slow to expand their offerings beyond the basics.   Small firms with just a few good offerings --  like Van Eck (whose brand name is Market Vectors) and WisdomTree have now reached more than $10 billion in assets.   But because fees are low, $10 billion in ETF assets is not that much revenue for a firm the size of Fidelity.  Nevertheless, the world is changing and Fidelity needs to do something about it or Schwab is going to end up owning the 401(k) ETF market by itself -- a massive market currently dominated by mutual fund companies but one that will eventually move to ETFs.

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