How Cheap Are Fidelity's New ETFs?

October 31, 2013

To be fair, Scottrade never had the reputation in the mutual fund industry that Fidelity currently enjoys. Fidelity has a long, successful product history that makes a comparison to Scottrade’s failed ETF experiment imperfect.

Further, Fidelity’s partnership with BlackRock gives it even more credibility. BlackRock is the subadvisor on the 10 new Fidelity ETFs, so concerns about the firm’s ability to manage the portfolio are effectively moot.

Scottrade had little product distribution and management experience, and Fidelity—in concert with BlackRock—has it in spades.

In other words, Fidelity is positioned for success. It has a better brand, a stronger partnership (BlackRock versus Morningstar) and fund distribution experience. If these funds struggle, it will be no fault of Fidelity’s, but rather, the market’s.

As we have detailed many times here in the past, “me-too” ETFs consistently struggle to attract big assets.

When exposure differences between established products and new launches are minimal, as they are in the sector space, investors have a hard time making the switch.

No matter how low the fee—and we have even seen issuers completely rebate an expense ratio in the past—and no matter how compelling the promise of commission-free trading, investors are increasingly concerned about and aware of all-in costs.

With that in mind, I have my reservations about Fidelity’s ability to compete with its new products, regardless of how strong the company infrastructure is.

The fact of the matter is that existing products from State Street Global Advisors, Vanguard and BlackRock have the capacity and liquidity to accommodate all types of investors.

It could be that I will be proven wrong—it happens all the time, after all—but I don’t believe these launches are the changing of the guard some have been making them out to be.

 


 

At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Baiocchi at [email protected], and follow him on his Twitter handle, @BaiocchiPaul.

 

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