Fidelity Magellan ETF (FMAG): A Legend at a Lower Cost

Fidelity Magellan (FMAGX, $12.74), one of Wall Street's most storied mutual funds, isn't just a mutual fund anymore.

It's an ETF too.

The financial service giant recently launched Fidelity Magellan ETF (FMAG, $19.46) alongside three other actively managed ETFs, creating a lower-cost version (0.59% in expenses versus 0.77% for FMAGX) of its legendary product.

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If you're not familiar with Magellan's history, it was arguably one of biggest mutual fund stories of the late 20th century. Magellan had a mere $18 million in assets under management (AUM) when Peter Lynch took over in 1977. But a wild 29%-plus average annual return helped FMAGX swell to $14 billion in assets by his departure in 1990. While Magellan eventually eclipsed the $100 billion AUM mark, it has since cooled off, though today it still manages a sizable $21 billion.

Joining FMAG are three other actively managed ETFs:

• Fidelity Growth Opportunities ETF (FGRO, $18.83), 0.59% expenses
• Fidelity Real Estate Investment ETF (FPRO, $20.28), 0.59% expenses
• Fidelity Small-Mid Cap Opportunities ETF (FSMO, $21.82), 0.64% expenses

FMAG, as well as FGRO and FPRO, are existing Fidelity mutual fund products thrown into a less-expensive ETF wrapper; FSMO is a wholly new product.

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They're not the first of their kind, and they're unlikely to be the last. Other fund providers, including American Century and T. Rowe Price, have forged a similar path in recent years, taking their established mutual funds and giving them the ETF shine.

Why Fidelity Is Going Active

The vast majority of ETFs are passively managed instruments (index funds). What sets them apart from indexed mutual funds is that they trade throughout the day, and they often have even lower expense ratios. Also, the very way ETFs function – how shares are actually created and redeemed – leads to greater tax efficiency, with exceedingly little of their net asset value (NAV) paid out as capital gains compared to mutual funds.

Mutual fund investors that have migrated to ETF investing over the past few decades are typically looking for one or several of these perks.

One thing they won't get is a perfect look inside the inner workings of Magellan.

Todd Rosenbluth, Head of ETF & Mutual Fund Research at CFRA Research, says "the ETF move will shine a spotlight into what's inside the ETF portfolio, due to the daily disclosure requirements of ETF holdings." By contrast, mutual funds are only required to publish holdings once a quarter.

That said, Fidelity will do this via a "proxy portfolio" that does include actual stock holdings, but also ETFs with holdings similar to what Magellan holds. This "semi-transparent" wrapper allows Fidelity to avoid showing all of its cards while still remaining compliant with SEC disclosure rules.

Despite differences such as these, Wall Street is demonstrating a growing appetite for the ease and lower costs of actively managed ETFs; assets in these funds surpassed $200 billion earlier this year.

Fund providers are increasingly quick to acquiesce.

"It's inevitable that Fidelity, an investment company with deep resources and a reputation for active mutual fund strategies, would dip their toe into the active equity ETF market," Rosenbluth says.

Will ETFs Eat Their Mutual Fund Counterparts?

Actively managed ETFs appear to be a logical progression for Fidelity. And indeed, "ETF-izing" name-brand mutual funds might attract new money from those who prefer investing through ETFs.

However, "there is a cannibalization risk in that the move could potentially attract away from existing mutual fund shareholders with a lower cost ETF," Rosenbluth warns.

Conversely, "investors familiar with the Magellan mutual fund might not be comfortable buying an ETF," he says, "while investors who have never heard of Magellan might not buy that ETF, either."

But there's risk in doing nothing, too. After all, if an investor is already looking to migrate from mutual funds to ETFs, and Fidelity doesn't offer similar lines of products at the ETF level, that investor might move their money into another provider's funds instead.

It's possible that Fidelity and other large mutual fund companies have seen the writing on the wall, and have decided it's better to keep those assets "in family," even if it's in newer, lower-cost versions of their existing products.