Fidelity Leaders Talk Non-Traditional Factors, Active | ETF Trends

Fidelity Investments’ leaders joined VettaFi’s head of research, Todd Rosenbluth, on a recent webcast to discuss the firm’s conversion of several existing strategies from mutual funds to ETFs. The conversions saw six of Fidelity Investments’ enhanced equity strategies become ETFs, like the Fidelity Enhanced Large Cap Core ETF (FELC). The webcast presented an opportunity to survey Fidelity leaders about those strategies, the growth of active ETFs in 2023, and how some Fidelity Investments’ ETFs use unique non-traditional factors.

The webcast, “Beyond Passive…Why Advisors are Increasingly Looking Beyond Passive ETFs for Their Clients,” included leaders like Fidelity Investments Director of Quantitative Market Strategy Denise Chisholm, Active Strategies and Quantitative Research and Investments CIO, Jessica Stauth, PhD, and Fidelity Investments Regional Director Ryan McKee.

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The enhanced equities strategies arrive at an ETF format amid a strong year for ETF usage. Per McKee, anecdotal evidence from Fidelity Investments’ advisor and RIA-facing team of CFAs indicated higher usage of ETFs than at “any point in the last several years,” following that team’s analysis of 2,000 different portfolios.

Active ETFs in 2023

Actively managed strategies have been a big part of that this year. Active strategies have picked up significant flows relative to their AUM, while also contributing notably to new product development. So, how, for example, does Fidelity see strategies like FELC and their use of active?

Stauth underscored that those funds swapped wrappers, “without making any changes to the investment process.” The strategies are actively managed, looking to outperform their benchmarks, while benefiting from the advantages of the ETF structure.

Stauth cited the use of factors in Fidelity Investments’ proprietary model as the most exciting aspect of its approach.

Non-Traditional Factors in Fidelity Investments’ Suite

FELC, for example, actively invests in large-cap stocks in the S&P 500. However, it leans on a disciplined, systematic investing approach that also embraces traditional and non-traditional factors.

“What we’ve done is identified proprietary long-term drivers of stock returns. They’re critically rooted in economic rationale, supported by empirical evidence. Really these are factors, but they’re proprietary factors,” Stauth said. “When we think about our day-to-day portfolio management, we are looking over and underweight positions based on our returns drivers. Still, we’re looking to carefully keep these portfolios on track.”

Fidelity’s Enhanced ETFs also rely on well-trodden views like value, momentum, quality, and growth. Fidelity Investments also looks to non-traditional factors, as well.

“We’re looking for data sets outside financial statement data. That might be options market data or securities lending market data. We’re also utilizing techniques like natural language processing and machine learning techniques to try to get broader insights and package them together in a more compelling way,” Stauth explained.

Together, the above factors, traditional and non-traditional, contribute to Fidelity Investments’ approach. Using non-traditional views can add to those core strategies. That may invite investors and advisors to look at Fidelity Investments’ suite and its new enhanced equity ETFs.

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