Home Adviser Fund Update Fidelity Preparing for ‘Smarter’ ETFs Published May 6, 2016 Fidelity Wants to Smarten Up 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. 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. stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. 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 fundsA 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. 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, dividendA cash payment to investors who own stock in the company. 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 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. 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. 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, 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., 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. 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