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Inside Fidelity's New Low Cost Sector ETF Lineup

Eric Dutram

While many mutual fund companies have resisted getting into the ETF market, several have slowly started to put out products in the space. The latest to embrace this trend appears to be Fidelity, as the company recently put out 10 sector ETFs targeting the U.S. market.

These ten funds represent the only products in the company’s ETF offering, save for their Nasdaq Composite Tracking ETF (ONEQ). This product offers up broad exposure to Nasdaq-listed stocks, and has about a quarter billion in assets, though volume is still light. So, this is really Fidelity’s first real foray into the ETF world, and it remains to be seen if the market can support even more sector ETFs.

Why they might succeed

While the U.S. sector ETF market is extremely competitive, there could be plenty of interest in Fidelity ETFs from the right type of investor. All of these sector funds look to trade commission-free on the Fidelity platform, making them prime choices for those who have Fidelity accounts, but haven’t yet jumped into the ETF space (see 3 Sector ETFs Crushing the Market in 2013).

Additionally, the products will be ultra-low cost, so Fidelity looks to be a fierce competitor on this front, and may attract cost-conscious investors even if they don’t have brokerage accounts with Fidelity. All of the 10 sector funds will have expense ratios of just 12 basis points, just edging out Vanguard who is traditionally thought of as the low-cost ETF provider, and charging 14 basis points for similar products.

The funds in the lineup include:

  • MSCI Consumer Staples Index ETF (FSTA)
  • MSCI Consumer Discretionary Index ETF (FDIS)
  • MSCI Telecommunications Services Index ETF (FCOM)
  • MSCI Industrials Index ETF (FIDU)
  • MSCI Utilities Index ETF (FUTY)
  • MSCI Information Technology Index ETF (FTEC)
  • MSCI Health Care Index ETF (FHLC)
  • MSCI Materials Index ETF (FMAT)
  • MSCI Energy Index ETF (FENY)
  • MSCI Financials Index ETF (FNCL)

These products look to provide investors with broad, cap weighted exposure (so a focus on large caps) to the U.S. market by sector. Most of the ETFs have at least a hundred holdings, though telecoms (just 33 stocks) and utilities (79 stocks) appear to be laggards on this front.

Still, even with a robust number of holdings, there are definitely some concentration issues, at least in a few sectors. Especially in the telecom space—dominated by VZ and T—and then technology with AAPL, some products are pretty concentrated into a few key stocks, though they all do provide broad exposure to their respective sectors (see 3 Top Ranked ETFs from Red Hot Sectors).

For investors curious as to why the company hasn’t expanded more into the broad markets, one could argue that is because they already have a commission-free trading partnership with iShares on many of its ETFs, including over a dozen representing various points in the style box.

Fidelity offers 65 iShares ETFs commission-free, so this does extend to several international, fixed income, and (a handful of) mining ETFs too (see all the Materials ETFs here). Given this, it will be interesting to see how this partnership evolves now that Fidelity is directly competing with some iShares funds, and may very well be looking to expand further if these are a hit.

Bottom Line

Fidelity finally started to jump into the ETF and it could definitely make a splash with its new lineup of sector ETFs. These funds will trade commission-free on the company’s already robust platform, and will be ultra-cheap choices as well (see all the top ETFs here).

While it seems doubtful that investors in current Vanguard or State Street products will switch to save two (or a handful of) basis points, new investors could definitely find this lineup interesting. This could especially be true if volume and assets pick up, and Fidelity follows this launch with other products to make itself a real force to be reckoned with in the ETF market.

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