How Fidelity Aims for Dominance in the ETF Space

Boston-based Fidelity Investments has been a go-to for investors for decades, thanks in large part to stellar performance in its Fidelity Magellan Fund (FMAGX) and its Fidelity Contrafund (FCNTX), among others. It's only in the past 15 years or so, however, that Fidelity has ventured into the exchange-traded fund (ETF) space. With ETFs growing at tremendous rates, it has only made sense for Fidelity to continue to expand its offerings in the area. In recent years in particular, Fidelity has worked to beef up its ETF offerings considerably. (See also: Fidelity Investments Active ETFs Among the Best: Barron's.)

From First ETF to Today

Fidelity's first ETF, called the Fidelity Nasdaq Composite Index Tracking Stock Fund (ONEQ), was launched in 2003. Fast forward 15 years, and the investment company has increased its ETF offerings considerably; it now lists 25 ETFs, including 11 passive equity sector-focused ETFs, 10 factor funds and three actively managed bond ETFs . Besides its lineup of 25 funds, Fidelity also offers its clients access to roughly 70 passive iShares-sponsored ETFs. All told, the company now boasts more than $11 billion in ETF assets under management, according to Investors.com. Beyond that, Fidelity has more than $380 billion in ETF assets under administration.

Expansion Plan

How did Fidelity come to focus so intently on the ETF space in recent years? A good portion of the impetus behind these new offerings may be due to the company's head of ETF management and strategy, Greg Friedman. Friedman joined Fidelity in 2013 and has worked to steadily increase Fidelity's ETF options for investors. Indeed, even as recently as early June 2018, Fidelity launched two new factor-based funds focused on the fixed-income area. Back in September 2016, Fidelity launched six other domestic factor ETFs, and then it added two additional international factor ETFs in the first weeks of 2018. The latest two ETFs as of this writing are the Fidelity Low Duration Bond Factor (FLDR) and the Fidelity High Yield Factor (FDHY). (For more, see: Fidelity Investments to Launch 2 Factor-Based Bonds ETFs.)

Friedman explained the motivation behind the two new ETFs in a statement: "with a quantitative, rules-based methodology at its core and an active liquidity overlay, Fidelity High Yield Factor ETF leverages our extensive high-income capabilities to offer an enhanced exposure to the high-yield market for ETF investors," he said. "Fidelity Low Duration Bond Factor ETF is unique in its category because it seeks a balance between credit risk and interest rate risk, on top of pursuing higher income potential than a money market with lower volatility than a short-term bond fund."

Motivation for ETF Growth

Friedman explained that Fidelity decided to enter the ETF space thanks to one of the company's "biggest differentiators: distribution power." Thanks to that capability, he says, "investors and advisors on [Fidelity's] brokerage platform can access a broad range of industry-leading ETFs commission-free."

Fidelity remains better known for its mutual funds, and there is room for concern about whether an added set of ETF offerings might take away interest (or inflow) into those core parts of the company's services. Friedman suggests, though, that "mutual funds and ETFs do not need to be an either/or proposition. Many investors and advisors use both to help meet their financial goals." He adds that "a good example is [Fidelity's] sector lineup, which includes sector mutual funds and ETFs. Since launching the sector ETF lineup in 2013 ... [Fidelity has] seen assets grow in both areas." (For additional reading, check out: Mutual Fund vs. ETF: Which Is Right for You?)

With a strong offering of commission-free ETFs on its brokerage platform and the support of Fidelity's substantial foundation and reputation as an investment company, Fidelity likely holds plenty of sway when it comes to increasing its ETF services. As long as customers continue to be interested in investing in that area, it's likely that Fidelity will move toward this space.