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As has been widely noted in this space, an increasingly prominent fund industry theme, and one advisors should stay abreast of, is mutual fund issuers converting those products to exchange traded funds.
Some of the biggest names in active management, including Capital Group (American Funds) and Dimensional Fund Advisors (DFA), are transitioning mutual funds to the ETF wrapper and it’s paying dividends. As just one example, on the back of MF-to-ETF conversions, DFA is already the eighth-largest U.S. ETF issuer.
This transition, which is ongoing with more room for growth, isn’t surprising. As advisors know, active management has its shortcomings. Not to mention active mutual funds are less tax efficient and come with higher fees than ETF counterparts – facts that cannot be ignored at a time when more clients are increasingly conscious of the benefits of tax-advantaged investments and low expense ratios.
Indeed, the conversion of mutual funds to ETFs isn’t necessarily an indictment of active management. However, this movement is young and has momentum. It got some more Wednesday with news that Fidelity will convert six of its mutual funds to ETFs.
Big Move by Fidelity
Obviously, the Fidelity news is of particular importance to advisors that custody with that firm. And let’s be honest, plenty of other advisors buy Fidelity funds on behalf of clients. With that in mind the Fideltiy mutual funds that will soon become ETFs are listed below.
The group of six is comprised of the Fidelity International Enhanced Index Fund (FIENX), the Fidelity Large Cap Core Enhanced Index Fund (FLCEX), the Fidelity Large Cap Growth Enhanced Index Fund (FLGEX), the Fidelity Large Cap Value Enhanced Index Fund (FLVEX), the Fidelity Mid Cap Enhanced Index Fund (FMEIX), and the Fidelity Small Cap Enhanced Index Fund (FCPEX).
The ETF versions of those products will be the Fidelity Enhanced International ETF, Fidelity Enhanced Large Cap Core ETF, Fidelity Enhanced Large Cap Growth ETF Fidelity Enhanced Large Cap Value, Fidelity Enhanced Mid Cap ETF and the Fidelity Enhanced Small Cap ETF.
Those conversions are slated to take place in November and will vault Fidelity’s ETF lineup to 50.
Size Matters
For one reason or another, advisors and retail investors gravitate to larger ETF issuers. Hence, those companies just get bigger and bigger. On that note, Fidelity’s MF-to-ETF conversion plans are notable because the six mutual funds make the switch have a combined $13 billion in assets under management.
If Fidelity converted those funds to ETFs today, its ETF assets under management tally would swell to $45.58 billion, bumping it the 12th-lagest issuer from its current spot at 13. Point is, more mutual funds will become ETFs. It’s just the way of the fund industry at this point in time.
“It’s a tactic that’s proved increasingly popular as investors opt for lower-cost, tax-efficient ETFs over their mutual fund brethren. Investment Company Institute data show that mutual funds are on track to post net outflows for a sixth consecutive year, while ETFs have absorbed about $194 billion in 2023,” according to Bloomberg.