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Fidelity Slashes Fees for 11 Sector ETFs

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The ETF industry is witnessing phenomenal growth and currently commands assets under management of $2.23 trillion, with contributions from about 1,658 ETFs. Thanks to growing competition in the ETF business, there has been in recent years a race to the bottom with regard to costs in order to gain market share. While many issuers have entered the fray, the lowest cost corner of the market is generally dominated by Charles Schwab and Vanguard (read: 1H ETF Asset Report: Gold Glows; Equities Fade).

But starting this month, Fidelity has joined Charles Schwab and Vanguard to compete for this space. Fidelity has slashed fees equally across 11 sector ETFs to 8.4 bps from 12 bps, marking a decrease of 3.6 bps.

The discounts came as part of a broader fee reduction in Fidelity’s offerings. Fidelity has total expenses on 27 of its equity and bond index mutual funds and ETFs. The average expenses across Fidelity's index fund line-up will decrease from 11.6 bps to 10.2 bps. This reduction in expenses is expected to result in annual savings of approximately $20 million to be enjoyed by current shareholders (read: Top and Flop Sector ETFs YTD).

The following are the ETFs that saw a cut in fees along with their AUM:

Fidelity MSCI Health Care Index ETF FHLC - $615.9 million
Fidelity MSCI Energy Index ETF FENY - $434.1 million
Fidelity MSCI Information Technology Index ETF FTEC - $390.3 million
Fidelity MSCI Consumer Discretionary Index ETF FDIS - $224.4million
Fidelity MSCI Consumer Staples Index ETF (FSTA - Free Report) - $283.9 million
Fidelity MSCI Financials Index ETF FNCL - $241.5 million
Fidelity MSCI Industrials Index ETF FIDU - $155.1 million
Fidelity MSCI Materials Index ETF FMAT - $104.0 million
Fidelity MSCI Telecommunications Index ETF FCOM- $165.6 million
Fidelity MSCI Utilities Index ETF FUTY - $271.1 million
Fidelity MSCI Real Estate Index ETF FREL - $139.8 million

Fidelity made this move as passive products are gathering more inflows as compared to the active ones. As per S&P Global Market Intelligence, investors withdrew $13.5 billion out of active funds, while adding $21.9 billion to passive products in May. Fidelity also witnessed similar fund flows. While Fidelity’s passive products gathered $2 billion, its active portfolios suffered an outflow of $3.5 billion.

Competition Not Far Behind

Competition in the passive ETF market is cut throat. So the expense ratio war is likely to continue in the near term. At the Morningstar Investment Conference this month, Vanguard Group CEO William McNabb stated his firm was ready to further reduce fees to attract investors’ fund and gain market share.

As things currently stand, Fidelity holds the position of the ETF provider with the lowest expense ratios. For example, Fidelity MSCI Health Care Index ETF is comparable with the Vanguard Health Care ETF VHT that has an expense ratio of 9 bps and has AUM of $5.7 billion. Similarly, comparing index ETFs in the energy space, Vanguard Energy Index ETF VDE, with $3.9 billion in assets, has an expense ratio 10 bps comparable with Fidelity MSCI Energy ETF.

Thus, Fidelity is looking for a bigger pie in the passive products market and to that end has slashed its fees considerably (read: 5 Successful New ETFs of 1H16).

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