Fidelity Investments is best known for its mutual funds, but the company is no stranger to exchange-traded funds.
The Boston-based asset manager rolled out its first ETF in 2003 with the Fidelity Nasdaq Composite Index Tracking Fund (ONEQ). This passive fund has racked up $1.9 billion in assets, but it seemed almost like a trial balloon because the company waited 10 years to introduce its next ETFs—specifically, a suite of 10 passive equity funds that track MSCI indexes tied the major GICS (Global Industry Classification Standard) industry sectors.
That was followed in 2014 by three actively managed fixed-income ETFs, along with other launches in subsequent years. Today, Fidelity is the 15th-largest ETF provider in the U.S. with roughly $12.6 billion in assets scattered across 25 funds.
The company’s push into ETFs is part of its strategy to become a multi-faceted financial services operation. It’s also an effort to try to counter the trend of cheap, passively managed index-based ETFs stealing market share from higher-cost actively managed mutual funds, of which Fidelity is more or less a poster child. But Fidelity’s ETF strategy isn’t about rolling out cheap beta products.
While its suite of GICS-related funds—since rejiggered and expanded to 11 products to reflect changes made to the GICS system—are passive and inexpensive (all have expense ratios of 0.08 pecent), the rest of Fidelity’s ETFs—with the exception of ONEQ—are either actively managed (on the fixed-income side) or factor-based products tracking in-house indexes developed by Fidelity’s research team.
“Fidelity wasn’t ever going to be a pure beta player like Vanguard, Street Street and iShares. It’s not who we are,” says Greg Friedman, Fidelity’s head of ETF management and strategy. “What makes us unique is our active and our fundamental research. We've entered the space in what I think is the right time, which is chapter two of the ETF playbook.”
Chapter one was based on passive, market cap-weighted ETFs, Friedman notes, adding that chapter two centers on what he calls “solutions.”
“Clients are saying, ‘I’ve got a lot of good market-cap exposure, now how do I get specialized? How do I get a solution outcome?’” he explains.
As such, Friedman says, Fidelity’s ETF strategy is based on trying to become an industry leader around active management and smart beta, or factor investing.
In September 2016, it debuted a group of factor-based equity ETFs that each track a Fidelity-built index and come with a competitively priced expense ratio of 0.29 percent. Five of these funds target a single factor from among dividends, low volatility, momentum, quality and value.