Harvard Case - Fidelity: Embracing ETFs
"Fidelity: Embracing ETFs" Harvard business case study is written by Rujing Meng, Jiayun Qian. It deals with the challenges in the field of Finance. The case study is 22 page(s) long and it was first published on : Mar 18, 2019
At Fern Fort University, we recommend Fidelity Investments embrace the growing popularity of ETFs by expanding its offerings, enhancing its technology platform, and implementing a strategic marketing campaign to capture a larger share of the ETF market. This strategy will leverage Fidelity's existing strengths in investment management, asset management, and technology while capitalizing on the increasing demand for low-cost, diversified investment options.
2. Background
Fidelity Investments, a leading financial services company, faces a strategic challenge. While it has a strong reputation in traditional mutual funds, the rise of exchange-traded funds (ETFs) is disrupting the investment landscape. ETFs offer investors low fees, diversification, and greater transparency compared to traditional mutual funds. Fidelity's current ETF offerings are limited, and its technology platform needs modernization to compete with the growing number of ETF providers.
The case study focuses on Abigail Johnson, Fidelity's CEO, who must decide how to navigate this evolving market. The company faces a critical decision: whether to embrace ETFs and invest in the necessary resources to become a major player in this growing market or to remain focused on its traditional strengths.
3. Analysis of the Case Study
To effectively analyze Fidelity's situation, we can use the Porter's Five Forces framework:
- Threat of New Entrants: The ETF market is relatively easy to enter, with new players constantly emerging. This creates competitive pressure on established players like Fidelity.
- Bargaining Power of Buyers: Investors have increasing bargaining power due to the availability of numerous low-cost ETF options. This forces providers to offer competitive pricing and features.
- Bargaining Power of Suppliers: The bargaining power of suppliers (e.g., index providers, technology providers) is moderate. Fidelity can leverage its scale to negotiate favorable terms.
- Threat of Substitute Products: Alternatives to ETFs include traditional mutual funds and other investment vehicles. However, ETFs offer advantages in terms of cost, diversification, and transparency, making them a strong substitute.
- Rivalry Among Existing Competitors: The ETF market is highly competitive, with numerous players vying for market share. This intensifies the pressure on Fidelity to differentiate its offerings and attract investors.
Fidelity's core competencies in investment management, asset management, and technology provide a strong foundation for success in the ETF market. However, the company needs to address several challenges:
- Limited ETF Offerings: Fidelity's current ETF portfolio is relatively small compared to its competitors.
- Technology Platform: Fidelity's technology platform needs modernization to provide a seamless user experience and advanced trading capabilities.
- Marketing and Distribution: Fidelity needs to develop a strategic marketing campaign to raise awareness of its ETF offerings and attract new investors.
4. Recommendations
To capitalize on the growth of the ETF market, Fidelity should implement the following recommendations:
- Expand ETF Offerings: Fidelity should significantly expand its ETF product line by introducing new ETFs across various asset classes, including equities, fixed income securities, and commodities. This will provide investors with a wider range of options and cater to diverse investment needs.
- Enhance Technology Platform: Fidelity should invest in modernizing its technology platform to provide a user-friendly interface, advanced trading tools, and real-time data analytics. This will improve the investor experience and enhance competitive advantage.
- Implement a Strategic Marketing Campaign: Fidelity should launch a comprehensive marketing campaign to highlight its ETF offerings and differentiate them from competitors. This campaign should focus on key benefits such as low fees, diversification, and transparency.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies: Fidelity's existing strengths in investment management, asset management, and technology provide a solid foundation for success in the ETF market.
- External Customers: Expanding ETF offerings and enhancing the technology platform will cater to the growing demand for low-cost, diversified investment options.
- Competitors: Fidelity needs to compete effectively with established ETF providers by offering a comprehensive product suite, advanced technology, and a compelling marketing message.
- Attractiveness: The ETF market is experiencing significant growth, presenting a substantial opportunity for Fidelity to expand its market share and increase profitability.
6. Conclusion
By embracing ETFs, Fidelity can capitalize on a rapidly growing market, attract new investors, and enhance its long-term profitability. Expanding its offerings, modernizing its technology platform, and implementing a strategic marketing campaign will position Fidelity as a leading player in the ETF space.
7. Discussion
Alternative options include:
- Maintaining the status quo: This would allow Fidelity to focus on its traditional strengths but risk losing market share in the rapidly growing ETF market.
- Acquiring an existing ETF provider: This would provide Fidelity with immediate access to a larger ETF portfolio and a more advanced technology platform but could be costly and complex.
Key assumptions include:
- Continued growth of the ETF market: This assumption is based on the ongoing demand for low-cost, diversified investment options.
- Fidelity's ability to successfully implement its recommendations: This requires effective execution and resource allocation.
8. Next Steps
To implement these recommendations, Fidelity should follow a phased approach:
- Phase 1 (Short-Term): Expand ETF offerings by introducing new ETFs across key asset classes.
- Phase 2 (Mid-Term): Invest in technology platform modernization to provide a user-friendly interface and advanced trading tools.
- Phase 3 (Long-Term): Launch a comprehensive marketing campaign to raise awareness and attract new investors.
By taking these steps, Fidelity can successfully navigate the evolving investment landscape and secure its position as a leading provider of investment solutions.
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Case Description
Forced by the investor preference for passive instruments like exchange-traded funds (ETFs) driven by ETFs' fee and performance advantages, regulatory pressures, and the rise of robo-advisors, the renowned active manager Fidelity embraced ETFs by introducing smart beta ETFs. As the new chairman, Abigail Johnson had to consider the challenges ahead including incompatibility with Fidelity's investment philosophy and fierce industry competition. The case is based on several concepts including ETFs, mutual funds, index funds, factor asset pricing models, financial innovation, active vs. passive investment management, and efficient market hypothesis, aiming to help students understand ETFs, especially smart beta ETFs, as well as Fidelity and other ETF providers. The case can be used to facilitate teaching in the area of Finance & Investments.
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