Fidelity Preparing for 'Smarter' ETFs - Adviser Investments

Fidelity Preparing for ‘Smarter’ ETFs

May 6, 2016

Fidelity Wants to Smarten Up ETFs

On April 8, Fidelity filed with the Securities and Exchange Commission (SEC) for permission to create self-indexing (or “smart beta”) funds that track proprietary indexes designed by Fidelity, rather than those created by an independent party such as Standard & Poor’s or MSCI.
Fidelity, which received SEC clearance to self-index in 2013 but now seeks “exemptive relief” for the flexibility to offer products more in line with its competitors, plans for its initial self-indexed funds to target large- and mid-cap U.S. stocks that have “attractive valuations,” a spokesman said.
(That cagey description doesn’t really give us much insight into a planned self-indexing formula. “Attractive valuations” is about as generic as it gets.)
Vanguard took its own tentative step into smart beta ETFs in December 2015, with the launch of four actively managed exchange-traded funds in England (click here to read our coverage).
As a refresher, so-called “smart beta” funds operate with one foot in both active and passive investment management. Rather than tracking a set benchmark index and investing to attempt to mirror the benchmark’s performance (minus operating expenses) like passive index funds and ETFs, smart beta funds are rules-based on factors other than price—sales growth, price momentum, low valuations, dividend payouts—and quantitatively driven. This is the “active” element: Those quantitative strategies underlying the indexes are tweaked by portfolio managers on an ongoing basis to match the funds’ objectives.
Fidelity was a latecomer to the ETF game, and has similarly been beaten to the smart beta market by competitors like iShares, Wisdom Tree and PowerShares, whose offerings have soared in popularity in the last two years. There are currently nearly 550 smart beta funds for investors to choose among, and these products accounted for more than a third of fund debuts in 2015. The competition for ETFs with strategies that seek to beat, rather than replicate, third-party benchmarks is fierce—some have already argued that the market is oversaturated by this latest flavor of the month.
Fidelity’s possible entry to this segment of the market is as much smart business as smart beta. In the ever-expanding universe of ETFs, Fidelity appears to be betting that its resources and active management reputation can be the “special sauce” to help it come from behind to build market share.
Time will tell what Fidelity decides to cook up in the smart beta space. The concept for funds like this is alluring, but how well Fidelity or any other provider can deliver on it over the long term remains to be determined.

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