The benefits of the ETF structure haven’t been lost on investors. Assets in ETFs have grown considerably over the last few years as investors forgo mutual funds for the advantageous fund structure. This fact also hasn’t been lost on many active and legacy asset managers. The number of active ETF launches has surged over the last year as the structure starts to hit critical mass.
But Fidelity might trump them all.
The firm already has an impressive line-up of ETFs, both passive and active. But its latest decision to convert more than $13 billion worth of mutual funds to ETFs could be the start of something big. As one of the largest fund managers around, Fidelity can quickly dominate the active ETF sector.
Making the Switch
When small asset manager Guinness Atkinson Funds turned two of its mutual funds into ETFs back in 2021, the world of mutual-fund-to-ETF conversions was born. Since then, numerous asset managers have taken the plunge, converting billions of dollars’ worth of mutual fund assets into ETFs. J.P. Morgan and Dimensional Fund Advisors have been two of the biggest adopters of the tactic and now are the number one and two issuers of active funds, respectively, because of it.
But they may have to pass the baton to another asset manager. In this case, we’re talking about Fidelity.
Asset manager Fidelity is a behemoth in the industry and isn’t a stranger to the ETF world, both passive and active. The firm has a suite of nearly 60 ETFs, covering a wide range of sectors, themes, and strategies. This includes several copycat ETFs—such as the Fidelity Magellan ETF—of its popular mutual funds. Some have grown quite large based on investor usage. For example, its active Fidelity Total Bond ETF has over $4 billion in assets.
Fidelity is no stranger to mutual-to-ETF conversions either. Last year, the firm converted six active thematic mutual funds that covered so-called disruptive themes into ETFs.
Six More Conversions
This brings us to today. Fidelity has filed to convert six more of its mutual funds into ETFs at the end of the fall. The six active funds comprise its “enhanced index” line-up of mutual funds. These funds seek to enhance the returns of an index by using active management to modify the weights of holdings for additional returns.
According to the SEC filing, the Fidelity International Enhanced Index Fund, Fidelity Large Cap Core Enhanced Index Fund, Fidelity Large Cap Growth Enhanced Index Fund, Fidelity Large Cap Value Enhanced Index Fund, Fidelity Mid Cap Enhanced Index Fund, and Fidelity Small Cap Enhanced Index Fund will all become ETFs on November 17. 1
Some of these funds are quite large. For example, the large-cap value enhanced fund holds more than $5.2 billion in assets, while the international version holds nearly $2 billion. All in all, the conversion is for over $13 billion in assets and will bring Fidelity’s ETF asset under management to north of $50 billion.
Moreover, several of the planned conversions are found in 401ks and other workplace retirement plans. According to PlanSponsor, the Fidelity small-cap enhanced index fund is found in 90 employer-sponsored 401(k) and 403(b) retirement plans. 2
A Long-term Winner
While Fidelity’s ETF assets may seem like a drop in the bucket when compared to BlackRock and Vanguard, the firm has a real advantage with mutual-fund-to-ETF conversions to scale up and grow quickly.
In total, Fidelity has roughly $4.5 trillion in assets under management. A lot of that is in its more than 100 different mutual funds. This provides a huge base for future conversions. And some of its funds are very large indeed, with tens of billions’ worth of assets. It’s largest non-index or money market fund is the Fidelity Contrafund and it holds more than $111 billion in assets alone. Very quickly, Fidelity can take the active ETF crown away from DFA and J.P. Morgan with a few more conversions.
Fidelity also has another potential win. The firm has $11.7 billion in assets under various workplace retirement plans. Here again, Fidelity has plenty of ability to gather assets for its active ETFs. With many plan administrators now starting to look seriously at ETFs for their plans and many plans allowing for fractional shares, Fidelity could make serious in-roads to grow its ETF portfolio, both active and passive.
Finally, the recent patent expiration from Vanguard allowing ETFs to be share classes of existing funds could push the whole thing over the edge and quickly make Fidelity a top three ETF issuer, period. All in all, number three ETF asset manager State Street has less assets under management in total versus Fidelity by about $1 trillion.
Fidelity Active ETFs
| Ticker | Name | AUM | YTD Price Ret (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|
| FBCG | Fidelity Blue Chip Growth ETF | $651.7M | 45.6% | 0.59% | ETF | Yes |
| FGRO | Fidelity Growth Opportunities ETF | $177M | 37.8% | 0.59% | ETF | Yes |
| FBCV | Fidelity Blue Chip Value ETF | $125.5M | 2.6% | 0.59% | ETF | Yes |
| FDIF | Fidelity Disruptors ETF | $98M | NA | 0.50% | ETF | Yes |
| FMAG | Fidelity Magellan ETF | $48.7M | 20.3% | 0.59% | ETF | Yes |
| FMED | Fidelity Disruptive Medicine ETF | $43.8M | NA | 0.50% | ETF | Yes |
| FIGB | Fidelity Investment Grade Bond ETF | $19.2M | -0.3% | 0.36% | ETF | Yes |
| FTBD | Fidelity Tactical Bond ETF | $14.6M | NA | 0.55% | ETF | Yes |
| FBND | Fidelity Total Bond ETF | $4.21B | -0.6% | 0.36% | ETF | Yes |
All in all, Fidelity’s ETF game is just getting started and, ultimately, it could be one of the biggest winners around.
The Bottom Line
Active ETF adoption has continued to grow as investors have taken notice of the fund structure’s benefits. Fidelity is looking to take advantage of that fact. After several successful launches and mutual-fund-to-ETF conversions, the asset manager is back at the well for six more. This could be the real start of Fidelity’s march to the top.
1 SEC (April 2023). PRIMARY DOCUMENT
2 PLANSPONSOR (June 2023). Fidelity to Convert More Than $13 Billion of Mutual Funds to ETFs