Fidelity joins index club?

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What’s this? Fidelity, one the largest active investment management companies has index investments?  It sure does. Fidelity’s Spartan 500 Index fund, with $48 billion in assets under management, is the flagship in the Spartan family of 14 index mutual funds. What’s going on? Is Fidelity going passive?

The fund war – fight or join

Fidelity, which built its business on stock-picking for its mutual funds, has only a small portion of its assets in index funds, but it’s a start. The company joins another dominant active manager, BlackRock, as a big name player in the index market.

We’ve written before how indexing, especially via index ETFs, is driving investment costs to near invisibility, creating a huge boon for investors.  The folks at Fidelity, the country’s third largest investment management firm, haven’t ignored the index trend. They have jumped in and are cutting fees, too. And none too soon, as Fidelity has been losing ground to index pioneer Vanguard.

Vanguard, the originator of index investing, had another banner year, winning the asset growth sweepstakes with record index inflows of $130 billion.

Be selective

Not all index investments are alike. In fact, only about 5 percent of the 1000+ available ETFs pass muster with us, based on our criteria of representation, tax-efficiency and low cost. (See our post “Built to last: ETF selection”)

We’re glad to see Fidelity’s Spartan index funds on their product menu, but we feel they are suitable only for use in tax-deferred accounts. Why? Because they are mutual funds, and when you buy a mutual fund you are the newest person buying everyone’s existing tax bill. Mutual funds are exactly that: you share in the gains but you also share in the tax basis. That means a greater chance of capital gains distributions and the tax bill that come with them. ETFs avoid this trap completely, because with an ETF you own your basis.

Fidelity’s foray into indexing can only be good news. More choice and more competition mean more tools for investors. But for us, not much has changed. As a goal-based index boutique for individuals, Osbon Capital has relied on index securities from day one. More competition and more assets simply validate the index model.

Active ETFs

Fidelity has also announced their intention to create a series of active ETFs that rely on Fidelity’s trademark stock picking investment approach.  I wish them the best, but we won’t be using them as we find that passive indexes, on average, offer better returns, lower expenses and better tax efficiency.

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This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.

Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.

Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.

Performance is not indicative of any specific investment or future results.  

An investment cannot be made directly in an index. Securities mentioned may or may not be held in client accounts.  


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