Fidelity Investments is crafting its first actively managed non-transparent equity exchange traded fund, potentially paving the way to bring more of its seasoned money managers into the ETF space.
“We are excited for this next step in Fidelity’s active equity ETF debut. We look forward to offering the best of Fidelity’s active equity capabilities in an ETF wrapper, delivered to our customers on a brokerage platform that provides exceptional value,” Greg Friedman, Head of ETF Management and Strategy at Fidelity Investments, said in a note.
According to an updated Securities and Exchange Commission exemptive relief filing, Fidelity Investments is working on the Fidelity Opportunistic ETF.
Right off the bat, Fidelity makes clear that this ETF is different from your traditional ETF. Specifically, “traditional ETFs tell the public what assets they hold each day. This ETF will not. This may create additional risks for your investment,” according to the filing.
Nevertheless, the trade off will also provide some advantages. By not disclosing information about the ETF on a day-to-day basis, this active ETF may face less risk that other traders can predict or copy its investment strategy in what is typically called “front running”. Consequently, by allowing the money manager to maintain his or her secret sauce, this may improve the ETF’s performance.
“If other traders are able to copy or predict the ETF’s investment strategy, however, this may hurt the ETF’s performance,” according to Fidelity.
Unlike other actively managed ETFs, Fidelity’s active non-transparent ETF publishes each business day on its website a “Tracking Basket,” which is designed to closely track the daily performance of the fund but is not the fund’s actual portfolio. Fidelity has argued that this daily published tracking basket provides enough information to facilitate market maker participation and hedging of intra-day arbitrage among market makers or Authorized Participants.
According to the exemptive relief, the Tracking Basket is comprised of: (1) select recently disclosed portfolio holdings (Strategy Components); (2) ETFs that convey information about the types of instruments (that are not otherwise fully represented by the Strategy Components) in which the fund invests (Representative ETFs); and (3) cash and cash equivalents.
The fund also publishes each business day its “Tracking Basket Weight Overlap” to provide investors with an understanding of how similar the Tracking Basket is to the fund’s actual portfolio in percentage terms.
However, potential investors should be aware that there is a risk that market prices of the fund may vary significantly from its net asset value. The fund’s shares may trade at a wider bid/ask spread, and the risks are heightened during periods of heightened volatility.
Additionally, the Tracking Basket is not air-tight black box, and traders may still attempt to use the Tracking Basket to identify the fund’s trading strategy.
The Fidelity Opportunistic ETF will try to generate long-term growth of capital by investing in domestic and foreign equities in either the growth or value style. The fund manager will use fundamental analysis of factors such as each issuer’s financial condition and industry position, as well as market and economic conditions, to select investments.
For more information on new fund products, visit our new ETFs category.