Fidelity debuts semi-transparent ETFs with triple launch

Jun 8th, 2020 | By | Category: Equities

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Fidelity Investments has launched three actively managed equity ETFs in the US that are the first to utilize the firm’s proprietary semi-transparent ETF structure.

Fidelity debuts semi-transparent ETFs with triple launch

The funds mark the debut of Fidelity’s proprietary semi-transparent ETF model.

Semi-transparent ETFs aim to avoid disclosing daily portfolio holdings while maintaining the tax efficiency, liquidity, and lower costs typically associated with ETFs.

The Fidelity model does this by publishing a proxy portfolio consisting of actual portfolio holdings, cash, and representative ETFs that hold securities similar to those held by the ETF.

According to Fidelity, by using diversified ETFs instead of individual stocks within the proxy portfolio, the model is better able to shield the manager’s intellectual property from front-runners.

Fidelity publishes the percentage weight overlap between the holdings of the ETF and its proxy portfolio on a daily basis, helping investors understand how similar the tracking basket is to the fund’s actual holdings.

The proxy portfolio is optimized to closely track the ETF’s performance, thereby providing enough information to effectively price and trade fund shares throughout the day. Actual portfolio holdings are disclosed on a monthly basis with a 30-day delay.

The funds

The funds, which replicate existing mutual fund strategies, have listed on Cboe BZX Exchange with expense ratios of 0.59%.

The Fidelity Blue Chip Value ETF (FBCV US) invests in US-listed large-cap stocks that are characterized by high earnings growth potential and sustainable business models.

The Fidelity Blue Chip Growth ETF (FBCG US) screens the same US-listed equity universe for firms that are considered undervalued relative to assets, sales, earnings, growth potential, cash flow, or compared to other companies in the same industry.

The Fidelity New Millennium ETF (FMIL US) is primarily focused on US equities but may invest in other countries, including emerging markets, to a lesser extent. It is managed with an opportunistic approach, investing across all sectors, market capitalizations, and styles. The strategy seeks to identify companies that may benefit from technological advances, product innovation, economic plans, demographics, and social attitudes.

Greg Friedman, Head of ETF Management and Strategy at Fidelity, commented, “Fidelity’s proprietary methodology is an industry-leading approach, designed to fit seamlessly within the existing ETF market and provide investors with greater choice and ease in accessing active investment strategies.”

Laura Morrison, Senior Vice President and Global Head of Listings at Cboe Global Markets, added, “We are pleased to collaborate with Fidelity Investments to launch the first proxy model semi-transparent ETFs. This remains a new and exciting opportunity for many asset managers, who are increasingly turning to Cboe’s proven expertise and unparalleled listings services – from product development and launch to marketing and distribution – to bring their semi-transparent products to market.”

Third-party licensing

Fidelity sees an opportunity to license the intellectual property to external asset managers, with Goldman Sachs among those already to have entered into a licensing arrangement.

Fidelity’s solution is one of a small, albeit growing, number active ETF wrapper solutions hitting the market.

Precidian Investment’s ActiveShares structure is a rival solution gaining traction with fund product developers. American Century Investments and Legg Mason have both rolled semi-transparent active ETFs this year utilizing the ActiveShares model, with other asset managers understood to have products in the pipeline.

The ActiveShares approach masks an ETF’s holdings by inserting a blind trust, known as a ‘confidential account’, between the fund and its authorized participants. The ETFs provide a live verified intraday indicative value (VIIV) every second, while official portfolio holdings are disclosed on a quarterly basis.

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