ETF Store Insight

ETFs Eating Fidelity’s Lunch

May 13th, 2009 by Nathan Geraci

“ETFs are beginning to eat everyone’s lunch in this industry.”

The above quote refers to the mutual fund industry and comes from none other than Jim Lowell, the editor of the Fidelity Investor newsletter.  A recent Bloomberg article highlighted a number of reasons for deteriorating asset levels at Fidelity, the largest mutual fund company in the world, and Lowell points directly to Fidelity’s lack of penetration into the growing ETF space as a primary cause.

Fidelity has watched its assets fall 4.9% over the past decade while the company’s total market share, including ETFs, decreased from 14.4% to 9.9%.  Poor fund performance (only 32% of the company’s funds beat peer funds in 2008) and the lack of a flagship fund to draw in new investors (no Fidelity fund ranks in the top ten in terms of assets) were clearly factors, but it’s apparent that the company’s failure to capitalize on the massive asset flows into ETFs was also a key culprit.

Comparatively, companies like Barclays Plc, State Street Corp, and Vanguard, the top three in exchange-traded fund assets, have continued to gain overall market share.  Consider Vanguard, the second largest mutual fund company, which saw their assets climb 91% over the same time period.  This comes as no surprise considering Vanguard’s concerted effort to become a major ETF player.  According to the Bloomberg article, Fidelity has only $65 million in ETF assets compared to Vanguard’s $40 billion (where a meaningful chunk of the company’s overall asset growth has originated).

In his latest newsletter, Lowell strongly recommended that Fidelity bid for iShares, the Barclay’s ETF business unit which they recently agreed to sell to CVC Capital Partners Ltd for $4.4 billion, in an attempt to stop the bleeding of assets and make an important strategic play in an industry increasingly gravitating towards ETFs.  This would have been a prime opportunity for Fidelity to immediately catapult to the top of the ETF industry and leverage their significant distribution and marketing muscle in a blossoming asset market.  Instead, Fidelity faces an uphill climb as they attempt to develop a viable ETF strategy to avoid getting their lunch eaten by the competition.  They had better move quickly.