Fidelity Likely Betting Big on Active, Quant ETFs

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Fidelity Investments announced Wednesday that it has partnered with BlackRock, Inc. (NYSE:BLK) to provide its customers with improved and increased access to a wide range of passive ETFs provided by iShares of BlackRock, Inc. (NYSE:BLK). The Boston-based investment firm also decided to raise the number of commission-free iShares ETFs to 65 from 30. Fidelity Investments currently has just one ETF, Fidelity NASDAQ Comp. Index Trk Stk (ETF) (NASDAQ:ONEQ).

Fidelity Likely Betting Big on Active, Quant ETFs

The two asset managers partnered after Charles Schwab Corp (NYSE:SCHW) launched a new platform where investors are allowed to trade more than 100 ETFs commission-free. But Fidelity Investments could be creating a road map, says Barrons analyst Brendan Conway. Fidelity is ceding the generic things to BlackRock, Inc. (NYSE:BLK), to pave the way for its own ETF lineup in a highly fertile territory – quantitative and actively managed funds.

The 65 commission-free iShares ETFs have a lineup of low cost funds suitable for the average investor, including iShares Core S&P 500 ETF. Fidelity Investments, which doesn’t have an impressive presence in rapidly-growing ETF market, has to catch up for the lost time. Conway thinks that the announcement of partnership with BlackRock, Inc. (NYSE:BLK) indicates that the Boston-based asset manager will not try to compete directly with the biggest ETF sponsors in the market.

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The analyst thinks that Fidelity Investments is not interested in passive funds, which means it doesn’t see a future in bringing its own version of the same old and popular ETFs. The passively managed ETF market has become far too crowded. On the other hand, actively managed funds and quantitative funds could prove a better bet. The market here isn’t populated. And these funds get premium prices even when they don’t perform well. It’s an area of focus for Fidelity Investments.

Brendan Conway thinks that Fidelity Investments can bring some real experience and expertise in both these types of funds. The sector-based funds could prove to be a sweet spot for Fidelity because a big question on active managers – if they can beat the index? – doesn’t apply to most of the select-sector funds. If Fidelity Investments select-sector funds can beat the passive funds, they can easily justify high pricing or expense ratios.

Quantitative funds are complex with comparatively much higher expense ratios. Most of the quantitative funds charge between 0.50 – 0.55% expense ratio. The conventional, passively managed ETFs charge as low as 0.05 – 0.10% expense ratio. Fidelity Investments is definitely gearing up for the big buck.