Fidelity Investments enlarged its ETF footprint Thursday (10/24/2013) by introducing 10 sector ETFs. Unlike most of Fidelity's actively managed mutual fund products, these new ETFs are designed to passively track MSCI USA IMI sector indexes. The IMI designation stands for Investable Market Index, which means each fund attempts to cover 99% of the investable U.S. sector market by including small and mid cap stocks. The new ETFs use market capitalization weighting to target each of the 10 major sectors identified by the Global Industry Classification Standard ("GICS").
According to the press release, Fidelity now offers the lowest priced sector ETF family with net expense ratios of just 0.12%. Fidelity hired BlackRock (BLK), the management firm behind the iShares brand, to sub-advise this new ETF lineup. Additional information is contained in the Fidelity Sector ETF FAQs and in the individual ETF links below:
- Fidelity MSCI Consumer Discretionary Index ETF (FDIS) (FDIS snapshot)
- Fidelity MSCI Consumer Staples Index ETF (FSTA) (FSTA snapshot)
- Fidelity MSCI Energy Index ETF (FENY) (FENY snapshot)
- Fidelity MSCI Financials Index ETF (FNCL) (FNCL snapshot)
- Fidelity MSCI Health Care Index ETF (FHLC) (FHLC snapshot)
- Fidelity MSCI Industrials Index ETF (FIDU) (FIDU snapshot)
- Fidelity MSCI Information Technology Index ETF (FTEC) (FTEC snapshot)
- Fidelity MSCI Materials Index ETF (FMAT) (FMAT snapshot)
- Fidelity MSCI Telecommunication Services Index ETF (FCOM) (FCOM snapshot)
- Fidelity MSCI Utilities Index ETF (FUTY) (FUTY snapshot)
These new sector ETFs are eligible for commission-free trading at Fidelity Brokerage when using online channels. After February 1, 2014, they will be subject to a short-term trading fee if held less than 30 days. For further information on these fees, please consult the Fidelity Brokerage Commission and Fee Schedule (pdf).
Analysis/Opinion: A week ago, Fidelity had just one ETF - the Fidelity Nasdaq Composite Tracking ETF (ONEQ) which was launched 10 years ago. Fidelity was the first firm to offer a suite of sector funds, with its Select Family of sector mutual funds introduced in 1981. However, when it came to sector ETFs, Fidelity has been conspicuous by its absence. Fidelity has now made a move, but the question of whether this is too little and too late remains unanswered.
Fidelity's claim of having the lowest cost sector lineup is true for now. The 0.12% expense ratio edges out the 0.18% fee for the Select Sector SPDRs and the 0.14% for most Vanguard sector ETFs. Expense ratio differences should be a non-issue for users of these funds. Additionally, the bid/ask spreads were held to one cent every time we checked Thursday.
The IMI approach of including small and mid cap stocks is an improvement over the large cap only approach of the Select Sector SPDR family in our opinion. The new Fidelity sector ETFs hold a combined 2,397 stocks versus 500 for the SPDRs. The IMI approach also provides enough holdings to implement all 10 GICS sectors, whereas the Select Sector SPDRs fold Telecommunication stocks into the Technology fund.
The new Fidelity sector ETFs are very comparable to the Vanguard sector suite. Vanguard also has funds for all 10 GICS sectors based on MSCI IMI indexes that include small and mid cap stocks. My guess is these two products will be indistinguishable to most investors and will likely boil down to differences in brokerage commissions and personal preferences. Our affiliate, Capital Cities Asset Management, uses Fidelity Brokerage and Wealth Management services, allowing it to get commission-free access to these Fidelity ETFs for its clients.
BlackRock has some flexibility in the day-to-day management of these ETFs, such as being able to use representative sampling instead of full index replication. Again, the Vanguard prospectus also allows for representative sampling.
Investor disclosure is one area where Fidelity can make inroads against Vanguard's entrenched base. The Fidelity snapshot pages (links above) are set up to provide investors with up-to-date information and analytics. Vanguard's ETFs are just another share class of their mutual funds. Therefore, Vanguard ETF investors receive the same delayed and limited information disclosures that mutual fund investors get.
Sector ETF sponsorship is a competitive arena. Many suites of sector ETFs have already bitten the dust, and others continue to struggle. These new ETFs began life Thursday with $20 million in assets each, so they are well on their way to staying off ETF Deathwatch. Additionally, Fidelity could ensure the viability of each of these by simply allowing their huge stable of mutual funds to implement a small portion of their sector allocations with these ETFs.
Disclosure: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.