Fidelity Investments, still firmly in the public’s imagination as the ultimate success story in the world of actively managed mutual funds, filed regulatory paperwork detailing plans to bring to market active ETFs, adding to its previously disclosed aim to launch index ETF strategies.
In the exemptive relief filing, the Boston-based company that still only has one ETF to its name, said the first active fund it is contemplating is the Fidelity Corporate Bond ETF, a security seeking “a high level of current income” that will invest at least 80 percent of its assets in investment-grade U.S. and foreign corporate credits.
The paperwork, filed on Friday, Dec. 7, follows by almost exactly one year a separate exemptive relief filing the company submitted to the Securities and Exchange Commission 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.
The company behind the legendary Fidelity Magellan Fund and the Fidelity Contrafund further signaled its newfound seriousness earlier this year when it named longtime ETF industry veteran Tony Rochte to head up a new ETF operation called SelectCo.
Rochte had been a managing editor 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.
Did Fidelity Miss Out?
As things stand, the company has only one exchange-traded fund, the Fidelity Nasdaq Composite Tracking Stock ETF (ONEQ), which it rolled out in September 2003 and which has about $175 million in assets.
That launch was arguably quite timely, as rival fund companies—including the now-No. 3 ETF company The Vanguard Group—were barely yet in the business of marketing ETFs themselves.
But because Fidelity never followed ONEQ’s launch with rollouts of any other strategies, the company is now widely perceived as having missed out on the early phase of ETF development.
Total U.S.-listed ETF assets reached a record $1.319 trillion on Friday, Dec. 7, even though fund rollouts have slowed in 2012, and fund closures have accelerated.
Many analysts think the ETF industry is on the cusp of another significant leg up in asset-gathering that will be predicated on penetrating the huge 401(k) retirement market, the infrastructure of which is for the most part designed around the mutual fund.
Whether Fidelity is well positioned to exploit the 401(k) market should it open up to ETFs remains to be seen.
Vanguard-esque Fund Structures?
Fidelity’s two filings detailing plans for both index and 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.
It’s unclear how close this comes to replicating Vanguard’s approach to the ETF market, whereby Vanguard ETFs exist as share classes of their existing index funds. Vanguard has a patent on its “share class” structure.
Fidelity declined to comment on the master-feeder structure when we asked about it a year ago, which is hardly a surprise since companies typically cannot comment on the contents of regulatory filings until they have been evaluated by regulators.
Derivatives Green Light
The latest filing outlining active ETFs appeared to contain language suggesting that active funds Fidelity will roll out will be able to use derivatives as part of their overall investment strategies.
That’s significant because the SEC made clear last week it would no longer put the freeze on requests to implement derivatives use in active funds following a 2-1/2 year review on the use of derivatives in active as well as leveraged and inverse funds.
However, the commission didn’t lift the restriction on leveraged and inverse funds that was first imposed in March 2010 .
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 from the date of the initial filing for a company’s first ETF to hit the market.
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