“Active ETF” Fee Competition Continues in Enhanced, Fundamental and High Yield
The argument against active management is often oversimplified to say active managers cannot beat indices. It is in fact slightly more nuanced: active managers may struggle to outperform indices after the fees and costs of active management, especially in more efficient markets such as US equities. Historically, mutual fund fees as high as 1.5% raised a high bar.
But now some active ETF products have expense ratios very close to, or even lower than, passive index tracker ETFs in asset classes such as emerging market equities or high yield bonds.
Fidelity is steadily converting mutual funds into ETFs with competitive costs. Its Enhanced index mutual fund range launched in 2007 and started converting into ETFs in June 2023, when fees on its related factor range came down from between 0.29% and 0.45% to between 0.15% and 0.25%.
Its latest ETF launches in November 2024 are: Fidelity® Enhanced U.S. All-Cap Equity ETF (FEAC) charging 0.18% and Fidelity® Enhanced Emerging Markets ETF (FEMR) charging 0.38%. The latter is less than the 0.70% charged by iShares MSCI Emerging Markets ETF.
In February 2024, Fidelity reduced fees on its actively managed discretionary fundamental range from 0.59% or 0.60%, to 0.38% or 0.43%. Its latest fundamental ETF launches in November 2024 are: Fidelity® Fundamental Developed International ETF (FFDI) and Fidelity® Fundamental Global ex-U.S. ETF (FFGX) both charging 0.55%, and Fidelity® Fundamental Emerging Markets ETF (FFEM) charging 0.60%, still less than the 0.70% charged by iShares MSCI Emerging Markets ETF.
The fee for Fidelity Enhanced High Yield ETF (FDHY) has been cut to 0.35% from 0.40%. This is very close to the average expense ratio of 0.37% on high yield ETFs, according to VettaFi.
Of course, if active ETFs trade more often than passive index trackers, they can still incur additional transaction costs, such as bid/offer spreads and commissions, so their overall costs might still be somewhat higher in some cases.
But with fee levels now comparable, any active management alpha has more chance of translating into higher returns for investors.