After much speculation, Fidelity Investments has confirmed that it is looking at ways to cut costs.

At a time when traditional active managers are bleeding assets, the fund giant appears to be in a situation where it could wind up laying off employees numbering into the thousands.

While the company has declined to specify where jobs could be cut, Fidelity's admission of a cost-cutting initiative, which has been bandied about in the press for months, provides an example of the different ways in which traditional managers and exchange-traded fund managers are being hit by the current market crisis.

The most basic issue for traditional managers versus ETFs has been the divergent paths in terms of asset flows since the markets were first roiled.

Through September, actively managed funds lost 10% of their assets, to $6.3 trillion, according to Morningstar data quoted in the latest issue of the ETF Report. (See story here.) ETFs have been flat, and index mutual funds, only down 0.01%. 

Active managers' inability to outperform in tough markets is part of the story of asset depreciation, but the cash flow numbers are even more stark.

ETFs had net cash flow estimated at $139.7 billion at the end of 2007. Through Q3 2008, ETFs have had net inflows of $97.7 billion, an annualized rate of $130.3 billion, and only a 6% drop, year over year.

Active funds, on the other hand, had just $38.2 billion in net inflows through September, down from $223.4 billion in 2007, a drop of a whopping 77%.

State Street Global Advisors, one of the largest ETF players, saw its total assets rise by more than $30 billion during the same time period.

Index mutual funds have experienced a 36% drop, and for the biggest index manager, Vanguard Group, its move into ETFs has helped to keep its net inflows numbers up at a time when the traditional fund world, most notably Fidelity, has been hemorrhaging assets.

No Immunity 

This is not to say that ETFs are immune from the market woes. In fact, new product launches have hit a standstill and the net new product numbers of late have been negative, with liquidations of unsuccessful ETFs outpacing the introduction of new portfolios.

Exchange-traded notes, in particular, have ground to a halt in terms of asset growth, with investors scared off the investments due to their unsecured credit wrap. The most recent monthly ETN data from the National Stock Exchange showed net outflows, and ETN providers have said new product pipelines are for now, at least, closed-off.

ETF managers will not be able to succeed with little in the way of assets, and there are way too many among the more than 800 ETFs with less than $50 million in assets.

Still, ETFs' lower fixed costs, as compared to traditional mutual fund costs, can make it easier for ETFs to survive these market conditions. Most notably, traditional mutual funds have the huge operational expenses associated with shareholder recordkeeping, whereas ETFs do not.

To be fair, Fidelity has long been considered a "bloated shop" by any standard, with more senior vice presidents and executive vice presidents than might be good for it. So the Fidelity issues may be more extreme than some of its peer active management shops are now facing.

But huge ETF players like Barclays Global Investors, State Street Global Advisers, and Vanguard, are not only experiencing a much lower asset drop due to their ETF focus, but also have the lower fixed costs of ETFs spread across the economies of scale created by the entire ETF family, which have been less sensitive to the market woes than active counterparts.