Fidelity Investments is rolling out exchange-traded fund share classes for three of its established mutual fund strategies, becoming the latest large asset manager to adopt a structure that was long the exclusive domain of Vanguard. The Boston-based firm announced the launch of the Fidelity Intermediate Municipal Income ETF (FIMU), the Fidelity Real Estate Income ETF (FREI), and the Fidelity Short-Term Bond ETF (FSTB), each structured as a share class of an existing mutual fund rather than a standalone product.
The three ETFs are set to list on the Nasdaq on Thursday. FIMU carries an estimated net expense ratio of 0.30%, FREI at 0.57%, and FSTB at 0.20%. The short-term bond strategy is managed by co-portfolio managers Dave DeBiase, Robert Galusza, and John Mistovich, who bring a combined 89 years of experience. The intermediate municipal income fund is overseen by Cormac Cullen, Michael Maka, and Elizah McLaughlin, with 26 years of combined experience, while the real estate strategy is led by Bill Maclay, a 27-year veteran of the sector.
“We are at an inflection point in the ETF industry, with exemptive relief providing the opportunity to offer additional product choice for investors,” said Greg Friedman, head of ETFs at Fidelity. He highlighted the strategies’ “long-term historical performance” and the “experienced portfolio management teams” running them. Fidelity said 53% of advisors’ portfolios included ETFs as of the fourth quarter of 2024, up from 44% a year earlier, citing internal data. The new share classes expand Fidelity’s shelf to 84 ETFs and exchange-traded products with $172 billion in assets under management.
The move follows the expiration of Vanguard’s patent on the ETF share class structure in May 2023, which had given the Malvern, Pennsylvania-based firm exclusive rights for decades. After the patent lapsed, nearly 80 fund managers filed petitions with the U.S. Securities and Exchange Commission for exemptive relief to add their own ETF share classes, according to ISS Market Intelligence. The SEC’s September approval of Dimensional Fund Advisors’ application for an actively managed strategy served as a catalyst, prompting a wave of filings. A November analysis by Brown Brothers Harriman found that more than 60 sponsors re-filed share class relief applications after the SEC signaled its willingness to approve them.
The managers that followed Dimensional’s original 2023 filing represent more than half of the active mutual fund market, approximately $8.5 trillion in assets as of August last year, according to ISS Market Intelligence. A 2024 survey by the same firm found that 60% of advisors would prefer to access a favored manager in ETF form, versus just 15% who would opt for a mutual fund. A separate BBH global investor survey in March showed that 86% of U.S. respondents said they would buy an ETF share class of a mutual fund if given the choice.
Clients currently holding shares of the existing Fidelity mutual funds on the company’s platform will have the option to convert their holdings to the ETF share class on a recurring, non-taxable basis, according to Fidelity’s announcement. This feature could appeal to advisors seeking to improve tax efficiency for clients, as the ETF wrapper allows for in-kind creation and redemption mechanisms that can reduce capital gains distributions.
However, the shift to multi-share class structures is not without challenges. BBH’s analysis highlighted that dealer platforms are examining how these structures interact with Regulation Best Interest, which requires broker-dealers to act in the best interest of clients when recommending investments. If a lower-cost ETF share class of the same strategy sits alongside a higher-cost mutual fund share class, advisors and their firms face added scrutiny over which vehicle they recommend and why. The SEC recently fined David Lerner Associates $201,600 for Reg BI violations in mutual fund switches, underscoring the regulatory focus on such recommendations.
ISS Market Intelligence also flagged capacity management as an issue. Unlike mutual funds, ETFs cannot be closed to new investors, a tool managers sometimes use to protect strategy performance in less liquid asset classes. This makes the structure a poor fit for highly concentrated strategies or those investing in smaller-cap equities or certain fixed income segments. Additionally, there is currently no industrywide standard for how platforms handle conversions from mutual fund shares to ETF share classes, according to BBH, meaning sponsors, dealer platforms, and administrators will need to develop consistent processes before conversions can be executed efficiently at scale.
Fidelity’s entry into the ETF share class arena comes as the industry continues to adapt to the post-patent landscape. With $172 billion in ETF assets and a growing lineup, the firm is positioning itself to capture advisor demand for tax-efficient, low-cost vehicles. As Greg Friedman noted, the inflection point is here, and the race to offer multi-share class products is accelerating.
