Fidelity Joins Mad Dash into ETF Share Classes

Fidelity is bringing one of the investment industry’s most talked-about structures to its own lineup.

The asset-management giant is making its first ETF share classes available this week, adding exchange-traded versions to three existing mutual fund strategies: the Fidelity Intermediate Municipal Income Fund, the Fidelity Real Estate Income Fund and the Fidelity Short-Term Bond Fund. The new ETFs (trading under the tickers FIMU, FREI and FSTB, respectively) will be listed on the Nasdaq and share the same underlying portfolios, investment objectives, management and performance histories as their mutual fund counterparts. The move places Fidelity among a growing group of firms embracing the ETF share-class structure after regulatory changes opened the door to broader adoption; just last week, Northern Trust filed for its own ETF share classes.

“We are at an inflection point in the ETF industry, with exemptive relief providing the opportunity to offer additional product choice for investors,” said Greg Friedman, Fidelity’s head of ETFs. “The long-term historical performance of these strategies paired with the experienced portfolio management teams make them a strong fit to adopt Fidelity’s first ETF share classes.”

Wrapper Wars

For decades, Vanguard held a patent on the model, which allows mutual funds and ETFs to operate as different share classes of the same portfolio. When the patent expired and the Securities and Exchange Commission began approving applications from other firms, asset managers rushed to capitalize on the structure’s potential benefits. Fidelity’s launch includes three income-focused strategies:

• FIMU, a municipal-bond strategy, will carry an estimated net expense ratio of 0.30%.
• FREI, focused on real estate debt and income-producing securities, will charge 0.57%.
• FSTB, a short-term bond strategy, will have a net expense ratio of 0.20%.

According to the firm, existing shareholders on its platform will be able to convert mutual fund shares into the new ETF classes as a non-taxable event, a feature long associated with Vanguard’s structure.

Farewell, Mutual Funds? The launch comes as ETFs continue to pull assets from traditional mutual funds. Jeff Sardinha, head of ETF solutions for North America at State Street, told ETF Upside in April that he expects mutual-fund-to-ETF conversions to contribute $50 billion to $60 billion in ETF inflows this year. Once mutual-fund-to-ETF tax-free exchanges are “automated along the entire value chain,” we should see larger asset migration, he added.

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