Fidelity plans first conversions to ETFs
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Fidelity plans to convert a set of six “disruptive technologies” mutual funds to exchange traded funds next June, the firm has disclosed.
These will be the first mutual funds that Fidelity will turn into ETFs, a company spokesperson said.
The $96mn Fidelity Disruptors, $91mn Fidelity Disruptive Automotive, $80mn Fidelity Disruptive Technology, $48mn Fidelity Disruptive Finance, $47mn Fidelity Disruptive Medicine and $34mn Fidelity Disruptive Communications mutual funds will become ETFs with the same name by June 16, the filing says.
The funds’ strategies will not change, and each will maintain the same investment objectives as their predecessor mutual funds, a company statement said.
About two months before the conversions occur, the funds’ management fees will drop to 50 basis points, the filing says. The management fee for the Disruptive Communications Fund is currently 99bs, and the other five funds charge 100bp management fees, fund prospectuses show.
The mutual funds are currently offered in retail, loyalty and F-share classes. Loyalty shares are available for investors who buy their shares through Fidelity accounts and have held their retail shares in the same account for a certain amount of time. The fee drops once the investor hits the three-year mark. Class F shares are not offered to the public.
Current shareholders of each fund will receive ETF shares equal in value to the number of shares of the mutual funds they own, the filing says.
The move “reinforces our commitment to growing our line-up with innovative strategies that help meet the evolving needs of investors”, said Greg Friedman, the firm’s head of ETF management and strategy, in a statement. The conversions aim to meet the demand of a “growing number of investors” who seek the tax efficiency and freedom within the ETF wrapper, he noted.
In early 2021, Guinness Atkinson became the first fund sponsor to convert mutual funds into ETFs, by transforming its Dividend Builder and Asia Pacific Dividend Builder funds.
A few months later, Dimensional Fund Advisors turned four mutual funds into ETFs. Soon after, the firm converted another three mutual funds to ETFs.
The first batch of converts has collected $6.1bn in net inflows since they changed over in June 2021, according to Morningstar Direct, and the second batch added $2bn. The last one has collected $199mn in net inflows since it became an ETF in May.
Dimensional had $63.7bn in ETF assets as of October 31, according to Morningstar’s database.
Some 81 per cent of the assets in Dimensional’s ETF line were from converted mutual funds as of July, according to analysis of FactSet data.
“We’ll see more conversions to ETFs on those expensive, actively managed mutual funds,” said Neena Mishra, director of ETFs for Zacks Research.
The six funds that Fidelity is transforming are part of a suite of thematic funds investing in companies that aim to change the way business is done in a particular industry.
“Investors are looking to allocate some portion of their portfolio to these technologies with a lot of growth potential in the future,” Mishra said. “That is what Fidelity is trying to do by offering the ETF, with better tax efficiency to their clients.”
Together, the six to-be-changed mutual funds had net outflows of $150mn in the year to the end of October, according to Morningstar Direct. The biggest bleeder was Disruptive Finance, which recorded $32mn in net outflows during the period.
Fidelity’s mutual fund line had $2tn in assets under management as of October 31, according to Morningstar Direct data, and its ETFs had $29.9bn. The ETF suite includes 19 active ETFs with a combined $3.7bn in October, the database shows.
Investors pulled $8.9bn from Fidelity’s mutual funds during the year ended October, and added $3.1bn to its ETFs.
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