Fidelity Plans Head-First Dive Into ETFs

December 02, 2011

Mutual fund giant files for right to launch index-based ETFs, including long/short products; unusual ‘master-feeder’ structure proposed.

 

(Updated with comments from Fidelity and Vanguard spokeswomen and with details throughout.)

 

Financial services giant Fidelity Investments filed papers with the Securities and Exchange Commission on Dec. 1, laying the groundwork for the company to expand its limited presence in the world of exchange-traded funds.

The company, which currently markets just one ETF, is now seeking to offer equity and fixed-income ETFs, covering U.S. as well as international markets. The filing it submitted to the SEC only contemplates index-based investments, although it is broad enough to permit 130/30 funds and other long-short products.

Many have wondered when the Boston-based company, which is one of the largest managers of mutual fund assets in the world, would make an aggressive push into ETFs. Its only ETF is the Fidelity Nasdaq Composite Index Tracking ETF (NasdaqGM: ONEQ). The ETF launched in September 2003, and has $155.7 million in assets.

A company official told IndexUniverse that the filing went well beyond what Fidelity requested from the SEC nearly a decade ago, and will extend the company’s ability to offer more types of funds, in terms of asset classes, geography and fund structures.

In an interesting twist, the filing asks for permission to create a “master-feeder” structure, whereby ETFs would invest solely in a “master fund” portfolio. That portfolio, in turn, could serve as the basis for other ETFs as well as other investment vehicles, such as traditional mutual funds.

It’s unclear how close this comes to replicating Vanguard’s approach to the ETF market, whereby Vanguard ETFs exist as share classes of its existing index funds. Vanguard has a patent on its “share class” structure.

Fidelity spokeswoman Sophie Launay declined to elaborate on whether the master feeder structure described in yesterday’s filing would resemble the Vanguard structure or that of any other ETF provider. But she did note that the filing was prompted by the fact that the SEC has granted much broader exemptive relief in the years since it granted Fidelity’s first order.

“We are always looking for new ways to serve our clients,” Launay said, saying the exemptive relief it is seeking in the latest filing would help it do so.

Companies typically cannot comment on the contents of a regulatory filing before it has been evaluated by regulators, so Launay’s reticence is hardly noteworthy.

Exemptive relief grants ETF firms exception to sections of the Investment Act of 1940 and is just the first step in the path to launching ETFs. It often takes at least six to 12 months

and sometimes longer—from the date of the initial filing for a company’s first ETF to hit the market.

Arrangement With iShares Unchanged

Boston-based Fidelity’s brokerage arm was notable last year for launching the first “commission free” ETF trading platform for 30 ETFs sponsored by iShares, the world’s biggest ETF company.

Fidelity’s Launay stressed that yesterday’s filing wouldn’t affect that agreement.

“The filing does not change in any way our arrangement with iShares,” Launay said.

The commission-free trading that has spread through the world of ETFs speaks to the lengths to which companies are going these days to capture new clients via ETFs.

Almost $1.065 trillion is now invested in U.S.-listed ETFs, according to data compiled by IndexUniverse. The first U.S. exchange-traded fund, the SPDR S&P 500 ETF (NYSEArca: SPY), was launched in January 1993, and now has just shy of $90 billion in assets.

 

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