Mutual fund giant Fidelity Investments dives a little deeper into the world of exchange-traded funds with today’s launch of three actively managed bond ETFs.
The Fidelity Total Bond ETF (FBND), Fidelity Limited Term Bond ETF (FLTB) and Fidelity Corporate Bond ETF (FCOR) products trade on the New York Stock Exchange. All three funds are run by the same management teams that respectively oversee similar namesake funds on the mutual fund side.
The three ETFs carry the same 0.45 percent expense ratio as the mutual funds they mimic. Given that, and the notion that ETFs these days are the sexy choice versus mutual funds, it begs the question whether these ETFs could steal customers away from the established mutual funds.
“We thought about the cannibalization impact during our conversations around the product development table,” says Scott Couto, president of Fidelity Financial Advisor Solutions. He notes the company’s experience with its suite of passive equity ETFs shows that ETFs and mutual funds attract different types of investors.
“ETFs tend to appeal to advisors who are looking for the ability to trade intraday,” he says. “That’s less important to more planning-oriented advisors who are more interested in holding a fund for a full market cycle. We haven’t observed cannibalization between our open-end funds.”
Last October, Fidelity rolled out 10 passively managed, market cap-weighted sector ETFs tied to MSCI benchmarks. Those equity funds all have expense ratios of 0.12 percent and are sub-advised by BlackRock. Fidelity says the collective group has garnered more than $1.4 billion in assets.
Regarding the three active fixed-income ETFs, FBND employs the same strategy as the Fidelity Total Bond Fund (FTBFX), an intermediate-term mutual fund with a duration of 5.13 years and a 30-day SEC yield of 2.57 percent.
The FLTB follows the path of the Fidelity Limited Term Bond Fund (FJRLX), a short-term mutual fund with a duration of 2.73 years and a yield of 1.50 percent.
The third fund, FCOR, is similar to the Fidelity Corporate Bond Fund (FCBFX), which has a duration of 6.83 years and sports a 2.73 percent yield.
Investors and registered investment advisors can purchase the three ETFs commission-free online through one of Fidelity’s brokerage platforms.
Fixed-income funds comprise roughly three-quarters of the $17 billion total assets invested in actively managed ETFs. That’s mainly because it’s harder for investors to front run fixed-income strategies due to the way the bond market works––a big consideration given the daily transparency of ETFs.
But daily transparency is a concern to providers of traditional equity mutual funds which typically report their positions quarterly, and has made them unwilling to roll out their own ETFs for fear that investors will exploit that transparency by mimicking or front running a fund’s positions.