The Curious Case of Fidelity Magellan ETF: Is Higher Fees Worth the Risk?
If you’ve been following the world of exchange-traded funds (ETFs) closely, you might have heard about Fidelity Magellan ETF (FMAG). This actively managed ETF, launched by Fidelity in 2014, aims to outperform the S&P 500 index. However, its performance over the last four years has left many investors scratching their heads.
FMAG’s Underwhelming Performance
Despite the ambitious goal of beating the S&P 500, FMAG has failed to deliver significant alpha. Alpha, in case you’re not familiar, is the excess return an investment generates relative to the return of a benchmark index. A fund manager earns alpha when they make smart investment decisions that result in higher returns than the index.
In the case of FMAG, its underperformance is a cause for concern. Over the last four years, the fund has lagged behind the S&P 500 index, leaving investors wondering if the higher fees they pay for active management are worth it.
The Cost of Active Management
FMAG’s expense ratio of 0.6% is significantly higher than that of the S&P 500 ETF Trust (SPY), which stands at a mere 0.09%. The expense ratio represents the annual cost of owning the fund, paid as a percentage of the assets under management.
While a 0.51% difference might not seem like much on the surface, it can add up over time. For instance, if you invest $10,000 in FMAG, you’ll pay $60 in fees annually. Over ten years, that fee would amount to $600.
More Volatility, Lower Reward
Another concern for investors is FMAG’s volatility. While the fund’s standard deviation is only slightly higher than SPY’s, the difference becomes more pronounced when looking at the fund’s Sharpe ratio. The Sharpe ratio is a measure of risk-adjusted return, which helps investors determine if the additional risk taken on by the fund is justified.
FMAG’s Sharpe ratio of 0.16 is lower than SPY’s 0.32. This means that for every unit of risk taken, FMAG delivers less reward than SPY. In other words, investors are taking on more volatility for a smaller potential return.
A Closer Look at FMAG’s Portfolio
So, what’s the reason behind FMAG’s underperformance and higher fees? Some argue that the fund’s portfolio closely mirrors that of the S&P 500, with only minor differences.
- As of August 31, 2021, the top 10 holdings of FMAG and SPY accounted for 64.2% and 61.6% of their respective assets, respectively.
- The correlation between the funds is high, at 0.98.
Given these similarities, some investors question why they should pay higher fees for FMAG when they can get similar exposure to the S&P 500 by investing in SPY.
Impact on Individual Investors
If you’re an individual investor considering FMAG, it’s essential to weigh the potential benefits of active management against the higher fees and increased volatility. While past performance is not a guarantee of future results, it’s a useful indicator of how a fund has handled various market conditions in the past.
In this case, FMAG’s underperformance and higher fees may not be justified, especially when considering the close similarity between its portfolio and the S&P 500 index.
Impact on the Wider Market
The underperformance of actively managed ETFs like FMAG could lead to a shift towards passive index funds and ETFs. This trend is already underway, with index funds and ETFs attracting record inflows in recent years.
If passive investing continues to gain popularity, it could put pressure on actively managed funds to differentiate themselves by offering unique investment strategies or lower fees. Ultimately, this could lead to a more competitive landscape for investors, with more choices and better value.
Conclusion
In conclusion, Fidelity Magellan ETF’s underperformance and higher fees, combined with its close resemblance to the S&P 500 index, raise questions about the value of actively managed ETFs. While some investors may still find active management appealing, it’s essential to consider the potential risks and rewards carefully.
For individual investors, it may be worth considering low-cost index funds or ETFs that offer broad market exposure. For those seeking more specialized exposure or unique investment strategies, actively managed funds may still be a viable option. However, it’s crucial to do your due diligence and carefully weigh the potential benefits against the costs.
As the trend towards passive investing continues, we may see more pressure on actively managed funds to differentiate themselves and offer value to investors. Ultimately, this could lead to a more competitive landscape and better choices for investors.
