The sixth product in this group, the Fidelity Divided ETF For Rising Rates (FDRR), targets the dividend yield factor with the idea being that higher-yielding companies tend to outperform lower-yielding companies over time. FDRR is weighted based on a composite score that considers dividend yield, dividend growth, dividend consistency and correlations to 10-year treasury yields.
FDRR is the largest fund from the Class of 2016, with assets of $367 million.
The Factors Maze
A number of ETF providers have jumped on the factor bandwagon in recent years, but many financial advisors—and retail investors at large—still aren’t sure how to employ them in investment portfolios.
“I think there's a lot of education that still needs to be done because people know ‘enough’—they understand low-vol and they understand dividends and they understand some of it,” Friedman says. “But if you really want a complete low-vol strategy there's more to it than just low-vol. So you might want some quality. There's a lot of education needed on how to use these tools. These are pretty sophisticated tools, and now us and other providers are bringing the institutional quality of investing theory into the hands of all investors, which is what we should be doing.”
Sounds great, but as investors learn about factors and come to realize that some factors work better in certain market environments than others, some observers wonder if this will encourage people to jump in and out of factor-based funds as conditions change—in other words, market timing.
Friedman doesn’t see it that way, and equates factor-based investing with sector-based allocations.
"Just like with sector rotation, you’re not going to choose just one factor,” he says. "For example, you’ll choose multiple sectors based upon where you think we are in the business cycle. No one should ever use just one [factor-based] product. These are tools that people can have either in a very simple allocation or a complex allocation. You have to think about what your objective is, talk to your advisor, talk to your financial planner and really create a sound investment strategy using these products.”
Active ETFs
In August, Fidelity filed its third amended application with the Securities and Exchange Commission for actively managed ETFs that wouldn’t disclose their holdings on a daily basis. Instead, these so-called non-transparent products would disclose their holdings on a monthly basis with a 30-day lag.
As described in the filing, each fund would have a tracking basket comprised of its recently disclosed portfolio holdings and representative ETFs. These baskets are designed to closely track the performance of a fund, and Fidelity anticipates the deviation in the returns between a fund and its tracking basket will be “sufficiently small” so that the tracking basket “will provide arbitrageurs with a reliable hedging vehicle that they can use to effectuate low-risk arbitrage trades in shares.”