Why Fidelity Isn’t Playing The ETF Game

Mutual fund giant Fidelity has just one exchange traded fund (ETF). As the ETF grows and gains an increasing amount of market share, though, Fidelity says that one is going to have to do.

Fidelity is the largest mutual fund company in the United States. While they have reorganized and diversified beyond that core aspect of its business, ETFs apparently are not part of the plan.

On other fronts, the company has reported market share gains this year with more money flowing in across its expanded range of financial services, reports Mark Jewell for The Washington Post. Those include individual retirement planning, employee benefit management and brokerage operations.

Is skipping out on the growing ETF industry wise? Investors bought more ETFs in the first half of this year than they did in the same period last year, reports Sue Asci for Investment News. The net inflows also increased: $35 billion in the first six months of 2009 vs. $26 billion in 2008.

Some feel that Fidelity is positioned to do just fine without ETFs. However, other big names in the mutual fund industry have entered the ETF space, most notably PIMCO. Further studies have supported the need for ETFs. One survey of financial advisors found that many expect to reduce their clients’ holdings of mutual funds to 27% in 2011, down 30% from today, and 35% in 2007. By 2011, expect ETF holdings to make up around 14% of their portfolios, or 8% more from now.

On the other hand, two-thirds of Fidelity’s revenue comes from 401(k)s. If the markets are up or even flat for an extended period of time, and their average fee is north of 1.1% and investors are now beginning to pour money into their 401(k)s again, why should Fidelity be motivated to offer ETFs and cannibalize their current business model?

• Fidelity NASDAQ Composite Index Tracking (ONEQ): up 26.9% year-to-date

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