David Vomund

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October 28, 2013
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Market Pulse: Fidelity sector ETFs ... wrong product at the wrong time

Fidelity announced that they are jumping into the ETF business by offering 10 sector ETFs. Is this a game changer for the company and a great opportunity for investors? Not so fast. It’s the wrong product at the wrong time.

First a background: Ten years ago Fidelity Investments launched its first and only ETF, Fidelity Nasdaq Composite (ONEQ). Since then, Fidelity has missed the burgeoning ETF business. With money flowing out of mutual funds and into ETFs, Fidelity decided to build its ETF business by offering the sector ETFs.

Fidelity’s selling point for their new passive sector ETFs is low cost, a charge of 0.12 percent per year. This is lower than sector funds from iShares, State Street, and Vanguard. Still, I believe this is the wrong product for Fidelity. Fidelity made a name for itself with its Select Sector mutual funds.

These funds have higher fees, but performance is improved because they are actively managed. From my studies the Select Sector funds outperform index ETFs after management fees. Fidelity should have kept this model by introducing active sector ETFs instead of running passive index ETFs.

Another problem with their ETF introduction is that it is too late. The iShares family has around 30 sector ETF choices and State Street offers very popular and heavily traded sector ETFs with a long track history.

When it comes to analyzing similar ETFs, investors almost always choose to buy the one that is most heavily traded and thereby most liquid. These are most often the ETFs that have been around the longest.

There are about 1,500 ETFs today, up from 150 ten years ago. With so many choices, successful ETF offerings must differentiate themselves from the existing choices. Fidelity’s sector ETFs fail to do this.

The passive sector space is already taken by iShares, State Street, and Vanguard. Instead, Fidelity should have introduced active sector ETFs, similar to their once popular Select Sector mutual funds. That would have differentiated this new product from the competition.

David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.

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Tahoe Daily Tribune Updated Oct 31, 2013 05:42PM Published Oct 28, 2013 05:24PM Copyright 2013 Tahoe Daily Tribune. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.