Fidelity Bets Big on Active ETFs

Fidelity Investments unveiled a new active equity fund and updated three existing equity funds as part of a new Fundamental ETF equity suite of products, the financial services giant announced Monday.

Fidelity is calling the new fund the Fidelity Fundamental Large Cap Value ETF (FFLV). The company Fidelity also launched a new active fixed income ETF, Fidelity Low Duration Bond ETF (FLDB), which aims to invest at least 80% of its assets in investment-grade debt securities of all types and repurchase agreements and charge a fee of 20 basis points.

“We look at the market and see what we can bring that is differentiated, and in this case, it’s an asset class within fixed income that did not have any coverage until this morning,” said Greg Friedman, Fidelity’s head of ETF management and strategy told etf.com. “It fits a client need to have that short duration exposure to a broad-based market of fixed income products,” he added.

As active ETFs continue to gain popularity due to their liquidity and narrow exposure to a specific market, many investment managers have been highlighting active fixed income as a space positioned for major growth as more investors move out of cash this year. Last year alone, assets in active ETFs skyrocketed 37%, according to data from Morningstar Direct.

Fidelity has 66 ETFs with more than $55 billion in assets under management, the company said.

In addition, Fidelity has lowered the fees and changed the management strategy on three equity ETFs. The Fidelity Growth Opportunities ETF (FGRO) and the Fidelity New Millennium ETF (FMIL) are merging into the Fidelity Fundamental Large Cap Growth ETF (FFLG) and the new combined ETF will have a 0.38% expense ratio, down from 0.59%. The Fidelity Small-Mid Cap Opportunities ETF (FSMO) will transition into the Fidelity Small-Mid Cap ETF (FFSM). Fidelity has 66 ETFs with more than $55 billion in assets under management, the company said.

The Fundamental suite ETFs will use a new quantitative active management technique, according to the company.

“The fundamental suite is active equity ETFs that take the higher convictions on some of our mangers and then have a quant overlay that ranks those convictions,” explained Friedman. “They got put into this really exciting new methodology of how we’re managing money.”

Active ETFs Gain Traction  

At the ETF Exchange Conference in Miami in mid-February, many investment managers and executives pointed to active fixed income as a still growing corner of the saturated ETF industry. While long term, many active ETFs still have a hard time beating their indexes, investors still use them to gain specific exposure that they can’t get with a broad index.

Tony Kelly, co-founder of BondBloxx, predicted that assets in fixed income ETFs will grow from 20% of the ETF market to 40% by 2030.

Many investment managers note that active bond ETFs tend to outperform their benchmarks more often than active stock funds, largely because of the way bond ETF indexes are structured.

“When I look at the space and see where there’s growth and where there’s room for development, it’s the active space as a whole—not necessarily looking at a tighter lens with fixed income versus equity,” said Friedman.

Contact Lucy Brewster at [email protected].