As the number and variety of ETFs continue to grow, classic ETFs have changed. Many investors are very familiar with the large market tracking ETFs that play core roles for millions of investors. The nature of the “passive” ETF may be changing, however. New ETFs that provide a different approach to passive have hit the scene just in time for rising market volatility. The recent VettaFi webinar, “Improve Upon Indexing: market considerations and a thoughtful alternative to passive” saw Fidelity Investments leaders discuss these developments.
See more: Low Duration Bond Factor ETF FLDR Upgraded Amid Uncertainty
The webcast, hosted by VettaFi Head of Research Todd Rosenbluth, touched on navigating this year’s complicated market environment. The webcast contained thoughts from leaders including Fidelity Investments’ Craig Ebeling, Michael Hagopian, and Denise Chisholm, who serve as vice president/ETF strategist, institutional portfolio manager, and director of quantitative market strategy, respectively.
ETFs & the Market Environment
The market backdrop continues to loom large over investors’ minds and portfolios, and the webcast proved no exception. Chisholm spoke about the “tricky time” facing investors and some of the specific concerns revolving around tariffs.
“So, the question is: could what we are seeing out of this administration in terms of tariffs be the shock that tips us into a recession?” Chisholm asked. “I think a study of history can show. We’ve seen big tax hikes in 1968, 1993, and 1982 approximate about 1% hit to income. (That) certainly seems like a lot, but none of those hits to income were in fact recessionary.”
That said, Chisholm added, investors should still be wary. Selling on bad news could be a pitfall, she noted, given that markets “discount much of the bad news in advance.” Directing investors and viewers to check out charts on her LinkedIn account, Chisholm suggested that markets may be in “bear adjacent” territory.
“So, this more looks like a shock or a panic, and I think investors need to at least be open-minded about the fact that those shocks and panics can actually return to positive gains fairly quickly, which is not to say, again, that the low in the market is in,” she added.
ETF Solutions
Turning to solutions amid that environment, then, what kind of twists on passive ETFs might investors consider?
Her colleague Craig Ebeling turned to current ETF uses and structures and how those may be changing. Ebeling revisited the nature of creation/redemption in the ETF vehicle and how ETFs look to track indexes. He noted that in the traditional passive ETF model, one might end up holding firms via ETF that may not always match up with investor goals.
“I’m not making any predictions or saying, ‘hey, those stocks might not necessarily give you good returns’…but with an index approach, you set it once a year and then you’re like, I hope these ones do well,” he said.
He further noted the case when a movie theatre chain was added to Russell 2000. The ETFs that tracked the Russell 2000 added the firm. They quickly saw significant selling given that the nation was facing the COVID lockdowns.
By contrast, he explained, non-passive, or active, ETFs, could avoid pitfalls like that. Of course, active ETFs don’t all exist way on the other end of the spectrum, with pure stock picking. Per Ebeling, growing active ETF adoption has led some issuers to consider active core allocations.
“In the industry in general, not just Fidelity, … you’re seeing a lot of activity in that kind of core type of exposure, but using the active ETF structure to improve upon what was there,” he said. “The core is being replaced by some of these core-like strategies that are using active implementation and a little bit more systematic stock exclusion, I’d say.”
Fidelity on FELC, Active Core & More
What should investors make of that information moving forward? Webcast viewers indicated via poll that they plan to buy despite the market uncertainty. Asked by Rosenbluth to comment, Hagopian identified a strong long-term opportunity.
“That tells me there’s a decent amount of market uncertainty, but if we think about long-term equity exposure and being able to come in at a point where we’ve had a bit of a discount in the market and being a long-term holder, it’s a great opportunity I think, and I think you’re seeing investors do that.”
The firm offers a suite of so-called “enhanced” ETFs that Hagopian mentioned as potential options.
“This really builds on what Craig’s covered comparing and contrasting passive and active ETF implementation,” he said. “We want to give investors a core equity exposure as part of that core and explore very similar exposure to a benchmark, while making security selection decisions with, I’ll call it, modest risk and active share relative to that benchmark. Really trying to improve upon the benchmarks, provide better outcomes over time.”
For example, the firm offers the Fidelity Enhanced Large Cap Core ETF (FELC ). The fund charges an 18 basis point (bps) to actively invest in large cap equities backed by a computer-aided quantitative system. The strategy has returned 9.78% since inception as of March 31st per Fidelity Investments.
For more news, information, and analysis, visit the ETF Investing Channel.
Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
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