In the past few years, passively managed mutual funds and ETFs have taken share from actively managed products.
However, through sector funds, Fidelity Research & Management has experienced growth with both types of funds.
In April 2016, S&P Global Market Intelligence sat down with Tony Rochte, President of Fidelity SelectCo, which offers sector mutual funds and ETFs that have more than $80 billion in assets. In this wide-ranging interview, S&P Global discussed why Fidelity launched sector ETFs and how they are positioned alongside sector mutual funds.
In addition, Rochte highlighted where the assets have been going and noted the addition of a Real Estate offering ahead of the pending GICS sector changes in 2016.
Fidelity sector-focused mutual funds include Fidelity Select Biotechnology Portfolio (FBIOX) and Fidelity Select Energy Portfolio (FSENX). The newer ETFs, which trade commission free on Fidelity’s brokerage platform, include Fidelity MSCI Health Care Index ETF (FHLC) and Fidelity MSCI Energy Index ETF (FENY).
Q: Fidelity has decades-long experience with sector investing through mutual funds. Why in 2013 did the firm launch sector ETFs?
Rochte: If you go back a year to 2012, we created a division inside Fidelity Asset Management called SelectCo. The division was focused on sector based investing in various formats. At the time we had 44 actively managed mutual funds with approximately $43 billion in assets. We pioneered sector mutual fund investing more than 30 years ago. For individual investors and financial advisors it was clear to us that there was continued appetite for sector products, but also a desire to express a view in a more tactical fashion. For that reason we launched a suite of initially 10 GICS based sector ETFs. There are now 11 with the addition of Real Estate and these complement the active mutual funds.
Q: Is there a preference for passive over active or vice versa?
A: We’re indifferent as long as we can provide a great investor experience. There are customers that want active management and we have seen continued growth for our sector mutual funds. And there are others that want an ETF product.
Q: What has been the biggest surprise to you since the ETFs launched?
A: In just over two years, we have raised just over $2.8 billion in assets for our ETFs. They trade extremely well and the spreads have been tight. We have one of the lowest cost families of sector based products with expense ratios of 12 basis points. However, we have grown also our sector mutual fund business to $82 billion over the last four years. So investors have looked to us for both passive and active strategies.
Q: Health care was a popular place to invest in 2015, with your sector ETF and your biotech mutual fund both pulling in strong inflows. Where have the assets flowed in early 2016?
A: There’s no question that health care at the end of 2015 was almost 25% of the sector category for us, including the actively managed funds. One thing we know about sectors is that we tend to see changes in sector leadership. We have certainly seen a shift, particularly in January and February, from more consumer discretionary and health care oriented exposures into more defensive ones such as consumer staples and utilities. In addition, energy has been an interesting space.
Q: You mentioned earlier the more recent addition of a Real Estate ETF. It is being added as its own GICS sector later in 2016. What do you think is the appeal of REITs?
A: While it has not been a GICS sector, REITs have been adopted by investors as separate. We have seen solid demand for our new ETF and we expect interest to continue. REITs are differentiated because they not only offer income but also capital appreciation depending on where we are in the economic cycle.
Q: What’s ahead for Fidelity SelectCo in 2016?
A: This year we are working to educate investors about how to use these types of exposures to augment their well-diversified portfolios. When we look at the $713 billion in sector investing at the end of 2015, 42% of it is in ETFs with the remainder in active and passive mutual funds. Our role is to provide the building blocks for investors and thought leadership about sectors. We work with our asset allocation team to help clients understand where we are in the economic and how sector strategies can fit their needs.
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