Fidelity International has launched a new actively managed ETF providing sustainability-focused exposure to emerging markets.
The Fidelity Sustainable Research Enhanced Emerging Market Equity ETF has listed on London Stock Exchange in US dollars (FEMR LN) and pound sterling (FEMS LN), and on Deutsche Börse Xetra in euros (FYER GY).
The fund has an expense ratio of 0.50% and comes to market with $20 million in assets under management.
While the ETF is actively managed, it is expected to bear a close resemblance to the MSCI Emerging Markets Index in terms of geographic and sector exposure and risk profile by maintaining a tracking error of less than 2% relative to this benchmark.
The ETF will, however, seek alpha by selecting and weighting stocks in favour of those that Fidelity’s research analysts have identified as having a positive fundamental outlook and strong sustainability credentials.
Fidelity’s fundamental process combines broad bottom-up, company-specific research with macroeconomic factor analysis and forecasts. Companies are scored based on research analyst views depending on buy/sell recommendations and how recently the rating was issued. These scores are then used to generate predicted return values for each stock.
Environmental, social, and governance (ESG) considerations are integrated into the portfolio by way of screening and company-specific ESG scores.
The screens typically remove companies in violation of globally recognized standards in areas such as environmental protection and human rights as well as firms that derive significant revenue from controversial activities including weapons manufacturing and tobacco production.
As well as excluding non-compliant companies, the ETF also systematically tilts towards companies commanding higher ESG scores. A company’s ESG score is determined using a combination of third-party data and in-house research which assesses key risk factors, including, for example, accounting and tax policies, disclosure and investor communications, shareholder rights, remuneration, and social and environmental factors.
Interestingly, neither the ESG score assessment nor the related screening may ultimately be determinative on investment decisions. The portfolio managers may still purchase and retain the stock of companies failing to meet the ESG criteria if it believes it is in the best interests of the fund – presumably for performance purposes. For ESG purists seeking consistency throughout their portfolio, this might be something to look out for.
The portfolio will typically consist of 300 to 350 stocks and will be rebalanced on a quarterly basis.
Fidelity offers a further three funds within its Sustainable Research Enhanced ETF suite. These ETFs, which launched in June, also utilize limited active management relative to well-known global developed (MSCI World), US (MSCI USA), and European (MSCI Europe) benchmark indices. They come with expense ratios between 0.30% and 0.35% and collectively house $230 million AUM.
Nick King, Head of ETFs, Fidelity International, commented, “Our new Sustainable Research Enhanced ETF range offers investors a cost-effective and differentiated product aligned to their growing ESG requirements. We’ve seen a good level of interest since the launch in June, and I am pleased we can now offer clients an emerging market building block to implement their regional views. We hope to expand the range further in the coming months.”