Fidelity to launch own ETF play but plans to lean on partners

Reuters

* Fidelity to launch 10 sector ETFs on Thursday

* Firm administers $125 billion in ETF assets

* Executive sees more ETF use in packaged products

By Ashley Lau and Tim McLaughlin

Oct 23 (Reuters) - As Fidelity Investments prepares tolaunch its first full lineup of sector exchange-traded funds onThursday, the Boston-based company is jumping in much later thanmany of its peers and is not trying to be the largest providerof ETFs.

Instead, Fidelity, which currently has $125 billion in ETFassets on its platform largely through third-party ETFofferings, is just as content to be an administrator of ETFscreated by rivals, such as BlackRock Inc, as it islaunching its own ETFs that complement what is already in themarket.

"We don't really see ETFs as a business," Jacques Perold,president of Fidelity Management & Research Co, said in aninterview. "We see ETFs as a vehicle in which you can deliverinvestment capabilities and capacity, but we have many othervehicles."

During the past two decades, the U.S. ETF industry hasmushroomed to $1.6 trillion in assets while Fidelity looked on,seemingly content to focus mostly on its empire of activelymanaged mutual funds.

In recent years, Fidelity came off the sidelines. But it hasonly one ETF to date - the Fidelity Nasdaq Composite Index. The firm, however, established partnerships withthird-party ETF providers like BlackRock, Pimco and Vanguard tooffer their products on the Fidelity platform. And thoserelationships will not be slowing down even as Fidelity comes tomarket with its own ETFs.

In fact, in the early going, Fidelity is leaning heavily onBlackRock's iShares to attract ETF investors to its platform.

"BlackRock has about 40 percent of the ETF market so that isa really good partner to have," said Todd Rosenbluth, an ETFanalyst at S&P Capital IQ.

Fidelity is using an approach that is similar to CharlesSchwab Corp, which had $179 billion in ETF assets onits platform at the end of September. Schwab's proprietary ETFshad $14.2 billion in assets.

In March, Fidelity expanded its three-year relationship withBlackRock's iShares business, promoting 65 iShares ETFs toclients without charging a commission. Previously, Fidelitylisted just 30 of such funds.

"We don't see ourselves as offering Fidelity-only products... nor do we see us not producing Fidelity products," Peroldsaid. "Where we see there is a gap in that choice, we will tryto fill that gap, either through providers like BlackRock or byproducing it ourselves.

READYING FOR SECOND PHASE

Thursday's ETF launch of 10 sector ETFs will track MSCIindexes in sectors ranging from financials to informationtechnology and energy.

The new ETFs will trade on the NYSE Arca and BlackRock willhave advisory role. With expense ratios of just 12 basis points,or $12 for every $10,000 invested, according to regulatoryfilings, the ETFs will be offered at a discount to competingETFs. State Street's Financial Select Sector SPDR Fund, for example, has an expense ratio of 18 basis points.

"Fidelity is clearly coming into a crowded market sector ofETF investing, but it is popular, too," Rosenbluth said.

During the first nine months of 2013, investors added $27billion to sector ETFs, according to BlackRock data. That was 20percent of the ETF industry's flows, even though sector ETFsrepresent only 12 percent of the industry.

"It is sure sign of sector ETFs gathering market share,"Rosenbluth said.

With the launch of Fidelity's ETFs, Perold said the firm isalready looking ahead to what he calls the "second phase" oftheir ETF plan, expanding from its partnership with BlackRock beyond passive, straight-forward, index-tracking and into moreactive strategies.

"We think that the second phase is going to be much morearound how you use these (ETFs)," Perold said, referring tomixing the funds in terms of packaged products and managedaccounts.

"We also think the active era will be something that willcontinue to grow over the next ten years," he said.

Fidelity also plans to launch five active fixed-income ETFs,which it filed for earlier this year and expects to launch nextyear.

TIPTOEING AROUND MUTUAL FUNDS

Fidelity is also constrained to a certain extent from goingall-in on ETFs because of concerns about cannibalizing its ownmutual fund success.

"We wouldn't want to put an ETF on a product where we aretrying to protect the existing mutual fund shareholders or theseparate account shareholders, for that matter, where someonecould somehow know what we're doing at all times," Perold said.

Fidelity's $101 billion Contrafund, for example,returned 8.94 percent in the third quarter, above the 5.24percent gain for the S&P 500 index. The fund is managed byclosely followed stock picker Will Danoff.

"We would be worried about having an ETF that preventedContrafund from being Contrafund," Perold said. "And it wouldnot be fair to Contrafund shareholders."

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