ETF Trends CEO Tom Lydon discussed the Fidelity New Millennium ETF (FMIL) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
The fund seeks long-term growth of capital. Normally investing primarily in equity securities. Identifying early signs of long-term changes in the marketplace and focusing on those companies that may benefit from opportunities created by these changes by examining technological advances, product innovation, economic plans, demographics, social attitudes, and other factors, which can lead to investments in small and medium-sized companies.
Investors can now access the stock-picking expertise from Fidelity’s historied money managers through a new non-transparent ETF offering. The advent of nontransparent ETFs is “the next evolution” of ETFs. FMIL is one of three new non-transparent ETFs that were adapted from Fidelity’s active mutual fund side.
The fund is basically an ETF version of an existing Fidelity mutual fund, which has been available to investors for decades – Fidelity New Millennium Fund (FMILX). FMILX has been around since 1992 and has $2.2 billion in assets under management. However, the ETF is cheaper than the mutual fund, with a 0.59% expense ratio vs a 0.69% expense ratio.
FMIL is part of Fidelity’s new model for “non-transparent” actively managed ETFs. ETFs have traditionally been known for their highly transparent nature, providing up-to-date data on daily holdings. Money managers have been loath to create an ETF version of their traditional active mutual fund strategies because of the fear of front-running. Active stock managers don’t like that they display their secret sauce in a fully transparent active ETF.
The fund uses a/ traditional mutual fund strategy that enjoys the benefits of the ETF investment structure. The new active equity ETF harnesses the power of Fidelity’s 74-year-old legacy of active management delivered with the tax efficiency, trading flexibility, and potential cost efficiency benefits ETF vehicles offer.
Fidelity’s Non-Transparent Model
The model includes a proxy portfolio that is publicly available on a daily basis along with the percentage by which it overlaps with the ETF’s actual portfolio. Fidelity argues that their method is superior because the firm uses ETFs in its proxy portfolio in addition to securities disclosed in the previous holdings report.
The ETFs are selected based on their correlations with the undisclosed securities, liquidity, and costs to create a close tracking differential to the actual portfolio. The use of ETFs in the proxy portfolio shields the fund’s holdings a bit better than if stocks were used. This is important beyond investors looking to game the fund, as many managers use similar strategies across a fund family.
Holdings are reported on a monthly basis with a 30-day lag. This is Fidelity’s standard for disclosure on its mutual funds and the model can adapt to any firm’s established disclosure schedule. The model has been licensed to other firms including Goldman Sachs. Fidelity promises that it offers liquidity, and it offers ease and simplicity that allows it to still look like an ETF while still operating like an ETF.
Other Non-Transparent ETFs
Just two other asset managers have launched non-transparent ETFs: American Century Investments and Clearbridge, in partnership with Legg Mason. They all use the ActiveShares structure from Precidian Investments.
Under that structure, holdings are disclosed quarterly with a 15-day lag and only a representative of the ETF’s authorized participants will have knowledge of the fund’s daily holdings.
For FMIL, the strategy targets innovation and new ways of doing business that can help propel capital appreciation. As noted, the fund seeks long-term growth of capital. It invests primarily in equity securities. Identifying early signs of long-term changes in the marketplace and focusing on those companies that may benefit from opportunities created by these changes by examining technological advances, product innovation, economic plans, demographics, social attitudes, and other factors. The strategy can lead to investments in small and medium-sized companies.
Listen to the full podcast episode on FMIL ETF:
For more podcast episodes featuring Tom Lydon, visit our podcasts category.