2 Bond Factor ETFs Launch

Today, Fidelity Investments rolled out two ETFs targeting fixed-income factors. The Fidelity Low Duration Bond Factor ETF (FLDR) tracks an in-house index, while the Fidelity High Yield Factor ETF (FDHY) is actively managed using a quantitative approach.

FLDR has an expense ratio of 0.15% and lists on the Cboe BZX Exchange, which is owned by ETF.com’s parent company Cboe Global Markets. FDHY comes with an expense ratio of 0.45% and lists on the NYSE Arca.

“Our focus is on where we can add value. We’re not looking to be a broad-based beta shop. … Where we’re focused is smart-beta and active. How can we take our fundamental research, our cornerstone of our success over the last 70 years, and codify that into an ETF?” said Greg Friedman, Fidelity’s head of ETF management and strategy.

“With a quantitative, rules-based methodology at its core and an active liquidity overlay, FDHY leverages our extensive high income capabilities to offer an enhanced exposure to the high-yield market for ETF investors,” he noted.

Meanwhile, Friedman noted that FLDR “is unique in its category because it seeks a balance between credit risk and interest rate risk, on top of pursuing higher income potential than a money market, with lower volatility than a short-term bond fund.”

2 Different Approaches

FLDR’s index covers investment-grade floating-rate notes with five years or less to maturity, and U.S. Treasury notes with seven to 10 years remaining on their maturity. The benchmark will typically have a duration of no more than one year, and is designed to provide an optimal balance between interest rate and credit risk in order to outperform the broad market of U.S. investment-grade floating-rate debt, according to the fund’s prospectus.

The seven- to 10-year Treasurys were added to the index’s design to create a little more yield for the product, Friedman notes.

FDHY is certainly different from FLDR.

“It’s active, but we think of it as smart beta because it’s not active fundamental security picking. We have a quantitative model of how to pick the best high-yield bonds that are correlated to value as well as quality for safety purposes,” Friedman said. “We’re thinking of it as, how do we create a portfolio with liquidity, good value, good safety as well as an overarching trading strategy.”

The actively managed fund covers high-yield debt, modeling its credit quality distribution and risk characteristics on those of the ICE BofAML BB-B US High Yield Constrained Index. FDHY can invest in securities from companies in dubious financial condition, such as those that are in bankruptcy or going through a reorganization or restructuring. Also, unlike FLDR, it can invest in securities from domestic and non-U.S. issuers, its prospectus says.

However, its active management decisions are guided by a multifactor quantitative model that looks at a universe of more than 1,000 bonds and emphasizes the value and quality factors to target holdings with potential for total return and a low likelihood of default, the document notes, adding that the fund’s active choices deviating from the model will be made to optimize trading and keep a lid on trading costs.

“We’re excited because it rounds out our family. These were a couple of large asset gaps that were in our lineup.” said Friedman. “We’re continually thinking about products that fill gaps in our lineup but that are also unique, that might be different, that our clients are asking for, and really thinking about, how do we solve our clients’ investment needs?”

Contact Heather Bell at [email protected]