Fidelity Investments, the second-biggest mutual-fund provider, plans to open the cheapest lineup of single-industry exchange-traded funds as it seeks to break into a market dominated by Vanguard Group Inc. and BlackRock Inc. (BLK:US)
Fidelity on Oct. 24 will start 10 funds, focused on industries ranging from energy to telecommunications, with an annual expense ratio of 0.12 percent, cheaper by 2 basis points than Vanguard Group Inc.’s lineup of similar ETFs, according to a regulatory filing and data compiled by Bloomberg. The ETFs, distributed by Fidelity, will be managed by BlackRock, the world’s biggest money manager. A basis point is one-hundredth of a percentage point.
“That tells me they want to be aggressive,” Michael Rawson, a fund analyst in Chicago-based research firm Morningstar Inc. (MORN:US), said in a telephone interview. “It’s going to be very difficult for them to build scale and liquidity in these products, but it’s a space they have to be in.”
Fidelity has been surpassed in assets by Vanguard and BlackRock in the past five years, in part because of the growth of index-based offerings such as ETFs. Fidelity, which offers only one ETF, has seen assets in its mainstay stock mutual funds decline 16 percent over the past five years, while management and advisory fees dropped an estimated 13 percent.
Fidelity and BlackRock have been collaborating on the development of ETFs and their distribution. The two companies in March expanded to 65 the number of BlackRock funds that Fidelity brokerage clients can trade commission-free. They are also working together on developing Fidelity-branded asset-allocation products built with BlackRock ETFs, Ron O’Hanley, president of Fidelity’s asset-management unit, said in an interview in June.
Fidelity spokespersons didn’t immediately return a phone call to the firm’s press office.
ETFs in the U.S. gathered $715 billion in the five years through 2012, more than twice that collected by actively managed mutual funds, according to data compiled by the Investment Company Institute in Washington. Index mutual funds collected an additional $263 billion.
State Street Corp. (STT:US) has the most popular collection of single-industry ETFs in the U.S., with $89 billion in assets, followed by BlackRock at $42 billion and Vanguard with $34 billion, according to Morningstar. State Street’s cheapest funds in that group charge 0.18 percent, while BlackRock levies no less than 0.30 percent, according to data compiled by Bloomberg.
Expense ratios aren’t the only contributor to costs, Rawson said. Larger and more liquids fund have lower transaction costs, so frequent traders prefer those products, he said.
ETFs are bundles of securities that trade on a stock exchange. They have attracted investors with their low costs, tax advantages and tradability. Most ETFs track an index of stocks or bonds.
Fidelity managed $1.77 trillion in assets as of June 30, including $1.56 trillion in mutual funds. Its one ETF is the $252 million NASDAQ Composite Index Tracking Stock ETF. (ONEQ:US)
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