Fidelity launches active ETF based on flagship Magellan strategy

Feb 8th, 2021 | By | Category: Equities

Fidelity Investments has rolled out four new actively managed ETFs utilizing the firm’s proprietary semi-transparent ETF structure.

Peter Lynch

The Fidelity Magellan Fund achieved an average annual return of 29.2% between 1977 and 1990 under the management of Peter Lynch.

One ETF offers a brand new strategy, while the remaining three are based on existing Fidelity mutual funds including the flagship Fidelity Magellan Fund.

The Fidelity Magellan Fund is arguably the world’s best-known actively managed mutual fund, celebrated for its record-setting average annual return of 29.2% between 1977 and 1990 under the stewardship of Peter Lynch.

By the end of the 20th century, the Magellan Fund had well over $100 billion in assets under management, although fund assets now stand at around $21bn.

The funds

The Fidelity Magellan ETF (FMAG US) may invest in US-listed common stocks and American Depository Receipts (ADRs) across all market capitalizations and styles, although the fund is expected to maintain a large-cap growth orientation. The approach harnesses proprietary quantitative and bottom-up fundamental analyses to identify high-quality companies that possess strong brands, best-in-class management teams, high barriers to entry, and are benefiting from long-term megatrends. The fund comes with an expense ratio of 0.59%, notably cheaper than the 0.77% currently charged on the mutual fund.

The Fidelity Growth Opportunities ETF (FGRO US) seeks long-term capital growth by investing in US-listed securities of companies believed to have above-average growth potential. It too has an expense ratio of 0.59%.

The Fidelity Real Estate Investment ETF (FPRO US) seeks above-average income and long-term capital growth by investing primarily in US-listed securities of companies engaged in the real estate industry. This fund also comes with an expense ratio of 0.59%.

The Fidelity Small-Mid Cap Opportunities ETF (FSMO US) is a brand new strategy that seeks long-term capital growth by investing in US-listed securities of small and mid-cap companies (those comprising the Russell 2500 Index). Both growth and value stocks may be selected for the portfolio. The fund comes with an expense ratio of 0.64%.

According to Fidelity, security selection for FGRO, FPRO and FDMO is driven by fundamental analysis of each issuer’s financial and industry position as well as market and economic conditions.

Fidelity semi-transparent 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 some 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.

Fidelity debuted its first semi-transparent ETFs in June 2020 with the launch of three funds that were also focused primarily on US-listed securities – a restriction currently imposed by the SEC on these types of products.

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