Fidelity's early ETF strategy leans heavily on BlackRock

BOSTON Fri Jul 26, 2013 1:44pm EDT

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BOSTON (Reuters) - Fidelity Investments disclosed on Friday its plans to use U.S. money manager BlackRock Inc as subadviser on a slate of 10 new sector-oriented exchange-traded funds.

The disclosure follows up a previously stated plan to have BlackRock help Fidelity develop its own line of equity sector ETFs.

"The filing for 10 passive sector ETFs builds on our 30 years of experience in sector investing," Fidelity spokesman Nicole Goodnow said.

Early last month, Fidelity planned to make a major announcement about its ETF strategy, but canceled it after getting hung up with regulators, according to people familiar with the situation.

Boston-based Fidelity is best known for actively managed mutual funds like Contrafund and Magellan, but the company has lagged rivals BlackRock, Vanguard Group and State Street Corp by several years in rolling out an ETF platform.

There are now more than 1,200 U.S. ETFs with assets totaling $1.4 trillion, up from assets of about $140 billion 10 years ago. As of June 30, BlackRock had $575 billion in ETF assets, followed by State Street ($318 billion) and Vanguard ($277 billion), according to State Street Global Advisors. Those three firms account for about 82 percent of the U.S.-listed ETF market.

ETFs have become popular with investors because they trade like stocks and their fees are much lower than actively managed mutual funds. In recent financial statements, Fidelity has acknowledged how a shift to ETFs and index funds could have an adverse effect on the company's investment management revenue.

Fidelity registered 10 ETFs in which BlackRock would act as subadviser, according to a preliminary prospectus filed on Friday. No fees were disclosed for ETFs that would follow sectors such as consumer staples, energy, banks, healthcare, utilities and telecommunications. The ETFs have not yet been approved by the Securities and Exchange Commission.

In March, Fidelity said it expanded its three-year-old partnership with BlackRock to offer its customers free trading of more exchange-traded funds, as the once-dominant mutual fund company strives to catch up in a faster-growing market.

Fidelity's ETF initiative is being run out of Denver by former State Street Global Advisors executive Anthony Rochte.

(Reporting By Tim McLaughlin; Additional reporting by Ross Kerber; Editing by Bernard Orr)

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