Fidelity Gets Active With New Actively Managed ETFs

Fidelity Gets Active With Stock ETFs

Fidelity Gets Active With Stock ETFs

Last week, Fidelity announced the launch of three actively managed exchange-traded funds (ETFs), becoming the largest issuer to offer “non-transparent” funds in an ETF package.

These funds are distinctly different from the typical ETF. Unlike traditional ETFs, which disclose all of their holdings every day, these new active ETFs veil their day-to-day portfolio moves.

Because of this opacity, Fidelity warns that investors may face higher trading costs with these ETFs. Unlike mutual funds, which are bought directly from the fund provider or a broker, ETFs trade on an exchange, and individual or blocks of shares are bought from other traders. This introduces trading costs into the equation for investors—with the active ETFs, traders may want to pay less to buy shares when they don’t know what’s actually in the portfolio. To help provide some measure of transparency, the firm will publish a “tracking basket” each day on its website that includes “some” of the funds’ holdings, but will not be the strategies’ “actual portfolio.” They will also provide a percentage indicating how close the tracking basket is to the ETF’s holdings on a daily basis.

So what’s the appeal here?

The non-transparency provides some advantages. By keeping its holdings close to the vest, the funds protect their “secret sauce,” reducing the risk that competitors can mimic or anticipate their investment strategies. Holdings will be reported on a monthly basis, akin to Fidelity’s standard disclosure on its mutual funds. Plus, the ETF structure means the securities will seek to keep the tax efficiency, lower costs and trading flexibility associated with exchange-traded funds.

All three of the new ETFs will carry an expense ratio of 0.59% and will be managed by the same portfolio managers and research departments of their mutual fund counterparts. They’re essentially ETF shares of existing mutual funds of the same names that come at a cost savings.

The new funds:

  • Fidelity Blue Chip Growth ETF (ticker: FBCG) will invest in “growth” stocks, or those the manager sees has having “above-average” growth potential. At least 80% of the portfolio will be in blue-chip companies, defined as “well-known, well-established and well-capitalized” large- or medium-size companies. Like the mutual fund of the same name, it will be managed by Sonu Kalra, with Michael Kim named as a co-manager on the ETF.
  • Fidelity Blue Chip Value ETF (ticker: FBCV) will concentrate on “value” stocks that the manager views as underpriced given the companies’ assets, sales, earnings, growth potential or cash flow. This fund will also invest at least 80% of assets in blue-chip companies. As with its mutual fund counterpart, it’ll be managed by Sean Gavin, with Anastasia Zabolotnikova as a co-manager on the ETF version.
  • Fidelity New Millennium ETF (ticker: FMIL) will invest in either growth or value stocks. Manager John Roth and co-manager Andy Browder seek to identify long-term changes in the marketplace and the companies that may benefit from these transformations. The mandate says the strategy will focus on companies with the potential to exceed earnings or growth expectations, or from sectors that are “undervalued or out-of-favor.” In practical terms, it means the managers can invest in innovative small- and medium-sized companies.

The ETFs’ 0.59% expense ratio undercuts the existing mutual funds: Blue Chip Growth charges 0.80%; Blue Chip Value, 0.65%; and New Millennium, 0.69%.

The new active funds add to Fidelity’s growing ETF roster, which also includes three actively managed bond ETFs, 14 factor ETFs, 11 passive equity sector ETFs and its NASDAQ index ETF, ONEQ.

We’ll be watching to see if Fidelity finds a foothold in the market with these active equity ETFs. The Boston fund giant might be the biggest issuer to bring such a product to market, but they’re hardly alone. The same week as Fidelity’s launch, BlackRock filed to bring four actively managed ETFs of its own to the market. Earlier this year, American Century Investments and Legg Mason delivered their own active ETFs to investors, and Goldman Sachs, JPMorgan Chase and T. Rowe Price, among others, have filed plans to do the same.

As longtime proponents of active management, we’re pleased to see new and cheaper options available to investors. Lower expenses allow investors to keep more money in their accounts over time and also provide a lower barrier for managers attempting to outperform market benchmarks—both pluses in our book.

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Chairman Dan Wiener Faces InvestmentNews’ ‘3 Questions’: Why We Turned Down a PPP Loan

Chairman Dan Wiener was featured on an InvestmentNews “3 Questions” segment to expand upon his recent CityWire op-ed. Dan explained why investment advisers like us shouldn’t take taxpayer-funded loans when there are small businesses and communities that really need them. In this business, Dan said, a bear market shouldn’t throw you into dire straits.

To see Dan’s lively and principled take, click here now!

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Podcast: Bad, But Getting Better: A Fact-Based Look at Reopening the Economy

What does “reopening” the economy mean? What does it look like? And is it working? Consumer spending, manufacturing and mobility numbers remain very low, but they are getting better. So how are we using a variety of medical, economic and societal data to inform our economic and market outlook?

Listen in as Director of Research Jeff DeMaso and Research Analyst Liz Laprade discuss:

  • Earlier pandemics and what they can (and can’t) tell us about COVID-19’s economic and market impact
  • How other countries have reopened and what their experiences may portend for us
  • Different states’ phased approaches to reopening and the impact on medical data
  • …and much more

Gain a useful window into how investment strategists are analyzing current data and what the path to some semblance of normal could look like. Click here to find out more!

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Adviser Investments’ Market Takeaways

You can find two new Market Takeaways videos on our website, featuring Equity Research Analyst Kate Austin with a look at the latest unemployment figures and Vice President Steve Johnson on how to put the market’s recent rally into perspective.

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