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Fidelity offer of no-fee index funds hurts shares of rivals

Published 08/01/2018, 05:10 PM
© Reuters.  Fidelity offer of no-fee index funds hurts shares of rivals
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By Tim McLaughlin and Ross Kerber

BOSTON (Reuters) - Fidelity Investments outlined plans on Wednesday to launch no-fee index funds, hurting the shares of rivals including BlackRock Inc (NYSE:BLK) as investors worried about lower profits.

The move marked the latest round of price cutting in the asset management industry, which has benefited from rising markets and steady inflows of investor cash to passively managed products.

"This news has likely led to the significant selling-off of asset manager stocks today with many of the stocks we track down (3 percent to 5 percent) versus flat for the S&P 500 index," Wells Fargo (NYSE:WFC) analyst Christopher Harris said in a research note.

"We wouldn't think the Fidelity funds in and of themselves would lead to much change with respect to asset flows, but investors are likely concerned about the follow-on effects," Harris said.

Publicly-traded asset managers whose shares declined on Wednesday included BlackRock, which closed down 4.6 percent, Legg Mason Inc (NYSE:LM), down 4.3 percent, and T. Rowe Price Group, down 1.5 percent.

Spokespeople for Legg Mason and T. Rowe Price declined to comment.

A BlackRock spokeswoman said via e-mail that Fidelity has also expanded to 240 from 70 the number of BlackRock's iShares exchange-traded funds available commission-free on Fidelity's platform.

"This, and the other actions Fidelity has taken, mean that it will be even easier for investors to access iShares ETFs," she said via e-mail.

Closely-held Fidelity of Boston said the Zero Total Market Index Fund and the Zero International Index Fund will be available to investors on Friday.

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"Investors will pay a 0.00 percent fee, regardless of how much they invest in either fund, while gaining exposure to nearly the entire global stock market," Fidelity said.

Fidelity also outlined other changes including requiring no minimum investment to open a retail brokerage account, and said it will cut prices on existing mutual funds.

Todd Rosenbluth of CFRA Research said the lower pricing will help Fidelity grow its online user base.

"Investors are using a combination of index and active mutual funds and ETFs along with stocks in their portfolios and Fidelity can benefit from offering their own and other products around these free funds," he said via e-mail.

Research firm Morningstar said in April the average expense ratio across U.S. funds stood at 0.52 percent in 2017, 8 percent lower than in 2016 and the largest annual decline since the firm started tracking the trend in 2000.

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