Fidelity Wins Active ETF OK From SEC

May 14, 2013

The firm behind the legendary Magellan fund gets one step closer to diving into the world of active ETFs.

Fidelity Investments, the Boston-based fund sponsor that’s planning what appears to be a major push into the world of exchange-traded funds, is one step closer to beginning that initiative after receiving regulatory approval from the Securities and Exchange Commission to begin marketing actively managed ETFs.

The SEC, in a document dated May 10, 2013, granted Fidelity “exemptive relief” to market active funds after the firm petitioned regulators for such approval in December of last year. While the paperwork suggested a broad and ambitious plan, it did specifically say that it planned for its first active fund to be the Fidelity Corporate Bond ETF.

That paperwork followed by almost exactly one year a separate exemptive relief filing the company submitted to the SEC requesting broad permission to market index ETFs. Together the two filings provide a clear signal that Fidelity’s move into the vibrant world of exchange-traded funds is broad and ambitious.

Fidelity’s plan to pursue active ETFs is totally separate from its agreement with BlackRock’s exchange-traded fund unit, iShares, to make common cause on marketing broad indexing and sector indexing ETF strategies.

As things stand, the company has only one exchange-traded fund, an index strategy called the Fidelity Nasdaq Composite Tracking Stock ETF (NasdaqGM: ONEQ) that it rolled out in September 2003 and which now has about $200 million in assets, according to data compiled by IndexUniverse.

ONEQ’s launch was arguably quite timely, as rival fund companies—including the now-No. 3 ETF company Vanguard—were barely yet in the business of marketing ETFs themselves.

But because Fidelity never followed ONEQ’s launch with rollouts of any other ETFs, the company is now widely perceived as having missed out on the early phase of ETF development.

A Multipronged Catch-Up Plan

The company behind the legendary Fidelity Magellan Fund and the Fidelity Contrafund further signaled its newfound seriousness last year when it named longtime ETF industry veteran Tony Rochte to head up a new ETF operation called SelectCo.

Rochte had been a managing director at Boston-based State Street Global Advisors, the No. 2 U.S. ETF company by assets after San Francisco-based iShares, the unit of BlackRock.

Fidelity’s two filings detailing plans for index as well as active ETFs each contain the same noteworthy twist; namely, that the company plans to make use of a “master-feeder” structure on both types of funds.

Under such a structure, its 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. The structure recalls Vanguard’s patented fund structure under which its ETFs are a separate share class of its mutual funds.

Additionally, the collaboration with BlackRock that Fidelity made public in March is seen by some ETF industry sources as emblematic of the next phase of ETF industry development; namely, the strategic pairing of marketing and distribution.

If that’s the case, then Fidelity may have figured out a shrewd way of going from laggard to trailblazer in one far-reaching joint venture.


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