Fidelity Investments, the firm that lost its position as the biggest U.S. funds provider after ignoring exchange-traded products for years, is seeking to open an actively run ETF lineup starting with a corporate bond fund.
The company, based in Boston, wants approval for a series of exchange-traded funds that would be eligible to invest in stocks, bonds or other assets, including mutual funds or ETFs, according to a filing yesterday with the U.S. Securities and Exchange Commission. The initial fund, with no introduction date listed, would invest mainly in investment-grade corporate debt.
Fidelity could yet become the first major mutual-fund firm to introduce ETFs run by active stock pickers. Once known for its top-ranked equity managers such as Magellan Fund’s Peter Lynch, Fidelity was passed by Vanguard Group Inc. in fund assets two years ago as the Valley Forge, Pennsylvania-based manager attracted clients to its index-based mutual funds and ETFs.
U.S. investors poured $368 billion into ETFs from the start of 2010 through this October while pulling $362 billion from actively managed stock mutual funds, according to data from the Investment Company Institute.
Fidelity had been working toward opening a series of actively managed ETFs modeled on its Select lineup of industry- focused stock funds, a person familiar with the matter said in July. The firm hired Anthony Rochte from State Street Corp. (STT)’s money-management unit in March to head its Denver-based Fidelity Select Co. unit.
ETFs hold about $1.8 trillion worldwide, most of it in products that track an index, according to BlackRock Inc. (BLK), the industry’s largest provider. The market for active ETFs is $13.1 billion. Active versions of the funds seek to combine the skill of a manager selecting investments with the trading flexibility, lower fees and tax advantages of ETFs.
Most stock pickers have resisted offering ETF versions of their mutual-fund products because the structure requires revealing almost all holdings every day.
Other firms including BlackRock have asked the SEC for permission to create actively managed ETFs that don’t have to disclose holdings daily. The agency, concerned that the lack of transparency would disrupt the proper pricing of ETFs, hasn’t approved any of those requests.
Fidelity’s active ETFs would be fully transparent, according to the filing.
ETFs disclose holdings daily in order to keep their share price in line with the market value of their holdings. When those values diverge, market makers profit on the difference by creating or redeeming shares in large blocks, which moves a fund’s share price back in line with assets. To do that, market makers need to know a fund’s holdings.
Transparency is seen as less a threat to fixed-income funds because it’s more difficult to replicate or front-run managers in the over-the-counter bond market, moves that can eat into profits.
Pacific Investment Management Co., whose Pimco Total Return run by Bill Gross is the world’s largest bond fund, is the leading provider of actively run ETFs. The firm, based in Newport Beach, California, has $7.1 billion in nine active fixed-income funds in the U.S. and Europe, including Gross’s $3.8 billion Total Return ETF (BOND), according to data compiled by Bloomberg.
Fidelity manages $39 billion in 60 industry-focused mutual funds in its Select series, according to Sophie Launay, a spokeswoman.
The firm’s largest industry fund with direct ETF rivals, the $2.7 billion Select Biotechnology Fund (FBIOX), returned an annual average of 23 percent, after fees, in the three years through yesterday. That beat the returns of BlackRock’s iShares Nasdaq Biotechnology Index ETF by more than 2.4 percentage points a year, and State Street’s SPDR S&P Biotech ETF by 3.2 percentage points a year.
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