Fidelity's ETF Push Puts It on Collision Course With Vanguard

The asset manager has filed to create ETF shares from its massive mutual fund base.

Fidelity Investments, the asset manager overseeing $4.3 trillion in client money, is seeking to offer exchange-traded-fund versions of its active mutual funds, in an attempt to grab ETF market share while increasing its competition with larger rival Vanguard Group.

Boston-based Fidelity, with $36.1 billion in 58 ETFs, wrote in an Oct. 25 filing with the Securities and Exchange Commission that it wishes to offer customers the choice between an ETF and a mutual fund based upon their needs. Fidelity, with most of its customers’ assets in mutual funds, also noted rising demand for ETFs, which have been chipping away at mutual funds’ dominance since their introduction 30 years ago. 

“The investor base for the Funds reflects a variety of shareholder types,” the document reads. Those include retail investors, clients represented by financial advisors, broker-dealers and more. Fidelity, it says, hopes to “help meet the evolving needs of investors.” 

Vanguard, with $2.05 trillion in 82 ETFs, patented the creation of ETF share classes out of mutual funds 23 years ago. According to Bloomberg, the move added $100 billion in gains to Vanguard shareholders. Vanguard’s patent expired in May, and whether the SEC will give another firm the exemption to pursue the structure remains to be seen.  

The agency has expressed concerns that the structure relies on ETF shareholders subsidizing mutual fund shareholders.   

In July, Dimensional Fund Advisors, which managed $614 billion, applied with the SEC to use a similar structure to Vanguard’s. Morningstar ETF analyst Bryan Armour at the time called it a “big win for mutual fund investors.”  

Fidelity Mutual Fund Conversions 

Many investors are increasingly looking toward ETFs over mutual funds because of their tax efficiency, liquidity and ease of access. Many issuers are taking advantage of investor interest in ETFs through fund conversions. Converting mutual funds to ETFs has become increasingly popular in the past few years. About 40 mutual funds with nearly $60 billion in assets have been converted to ETFs. 

“For those investors who prefer investing in ETFs and are interested in existing Funds, an ETF Class could be an attractive investment opportunity,” the Fidelity’s filing says.  

Despite Vanguard’s dominance, Fidelity’s massive mutual fund business would launch the firm into the upper reaches if it created share classes for many of its funds.  

The firm’s biggest ETF is the $6.9 billion Fidelity MSCI Information Technology Index ETF (FTEC). 

Contact Lucy Brewster at [email protected].