Home Adviser Fund Update Fidelity Expands ETF Lineup Published February 13, 2015 Fidelity Launches Real Estate ETF Last week, Fidelity debuted its twelfth passively managed ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., Fidelity MSCI Real Estate Index ETF, trading under the ticker FREL. In the year-plus since Fidelity launched 10 sector ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. (which we discussed in a previous issue), they’ve proved to be popular investments, drawing more than $2 billion in assets under management since their inception in October 2013. Like its other sector ETFs, FREL carries an annual expense ratio of 0.12%, is sub-advised by BlackRock, and will trade commission-free on Fidelity’s brokerage platforms. Fidelity’s newest ETF is slightly more expensive than its rival Vanguard REIT ETF, which costs 0.10% and is the biggest REIT ETF on the market. While the two ETFs may compete for investors’ dollars, it should be noted that they track two slightly different MSCI indexes. Vanguard’s ETF attempts to mimic the returns of the MSCI US REIT index, which is focused on real estate investment trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process. (companies that own real estate properties and generally pay out regular income), while the FREL tracks the MSCI USA IMI Real Estate index, which is composed mostly of REITs, but can cast a wider net and owns some real-estate-related common stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. as well. So while both ETFs are tracking a fairly thin slice of the U.S. stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market, their portfolios and performance will likely be somewhat different month to month. Real estate mutual funds were at an all-time high in assets at the end of 2014 as people seeking higher-yielding alternatives to bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. flocked to the sector, which may have been the impetus for Fidelity to make its ETF entrance into this space (the fund giant already has nine other index and actively managed real estate funds on its roster). Adviser Investments’ stance on real estate and other niche sector funds is that buyers should beware. Narrowly focused investments like these can have periods of strong outperformance over the markets such as REITs did in 2014, when Vanguard’s REIT ETF gained 30.3% compared to the S&P 500’s 13.7% return for the year. However, that potential return goes hand in hand with significant riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline.. During the financial crisis, Vanguard REIT ETF plummeted 68.2%, a very difficult ride for investors who owned the fund at that time. Our approach to sector investing is to let the active managers we invest alongside to set the exposures within their diversified portfolios. This way we gain access to their top picks in a sector without making a big bet that could come back to harm our overall portfolio. We think this is the best path for most investors to follow. New Vanguard BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. Fund Debuts On February 9, Vanguard launched its Ultra-Short-Term Bond fund. The fund, which we touched on in our Dec. 5, 2014 issue, provides a money-market alternative for investors who can withstand some volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. in their share price, and is likely to be a welcome new option for people who have substantial sums tied up in money funds that pay out 0.01%. Vanguard has wavered on whether the fund is or isn’t officially a money-fund replacement, but as they’ve written, it should act to “earn a better return than the near-zero yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. of a money market fund without losing the ability to access your money.” Vanguard is not yet reporting a yield for the fund, but Ultra-Short-Term Bond’s Investor (VUBFX) and Admiral (VUSFX) shares will have minimums of $3,000 and $50,000, respectively, and charge 0.20% and 0.12% in annual expenses. The fund is managed by Greg Nassour and David Van Ommeren. About Adviser Investments Adviser Investments is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, with particular expertise in Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. Our minimum account size is $350,000. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868. Disclaimer: This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations, personal investment advice or considered an offer to buy or sell specific securities. 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