The IMI approach of including small and mid cap stocks is an improvement over the large cap only approach of the Select Sector SPDR family in our opinion. The new Fidelity sector ETFs hold a combined 2,397 stocks versus 500 for the SPDRs. The IMI approach also provides enough holdings to implement all 10 GICS sectors, whereas the Select Sector SPDRs fold Telecommunication stocks into the Technology fund.
The new Fidelity sector ETFs are very comparable to the Vanguard sector suite. Vanguard also has funds for all 10 GICS sectors based on MSCI IMI indexes that include small and mid cap stocks. My guess is these two products will be indistinguishable to most investors and will likely boil down to differences in brokerage commissions and personal preferences. Our affiliate, Capital Cities Asset Management, uses Fidelity Brokerage and Wealth Management services, allowing it to get commission-free access to these Fidelity ETFs for its clients.
BlackRock has some flexibility in the day-to-day management of these ETFs, such as being able to use representative sampling instead of full index replication. Again, the Vanguard prospectus also allows for representative sampling.
Investor disclosure is one area where Fidelity can make inroads against Vanguard’s entrenched base. The Fidelity snapshot pages (links above) are setup to provide investors with up-to-date information and analytics. Vanguard’s ETFs are just another share class of their mutual funds. Therefore, Vanguard ETF investors receive the same delayed and limited information disclosures that mutual fund investors get.
Sector ETF sponsorship is a competitive arena. Many suites of sector ETFs have already bitten the dust, and others continue to struggle. These new ETFs began life today with $20 million in assets each, so they are well on their way to staying off ETF Deathwatch. Additionally, Fidelity could ensure the viability of each of these by simply allowing their huge stable of mutual funds to implement a small portion of their sector allocations with these ETFs.
This article is brought to you courtesy of Ron Rowland from Invest With an Edge.