ETFs at Fidelity: Under the hood

How the range differentiates from competitors

underthehood article-image

The key benefits that ETFs can provide investors are well known – cheap and easy access to specific markets or defined types of investment. However, not all ETFs are created equal. As such, Fidelity’s dedicated team of experts has listened to clients and worked hard to establish a range of ETFs that takes a differentiated approach to best meet their needs.

In this article, we have outlined factors that we believe differentiate Fidelity’s ETF range from other solutions available in the marketplace.

Ultimately, the most efficient product for achieving a client’s goals is the right product, regardless of the type or style of management, and we have designed the Fidelity ETF range to act as a suite of best-in-class asset allocation building blocks.

Fidelity ETFs: Active or passive?

We view Fidelity ETFs as sitting between the extremes of active and pure passive management, which allows them to provide some of the benefits associated with active funds alongside the cost and transparency advantages of passive solutions.

To accomplish this, they employ one of two investment processes: customised passive index tracking or systematic active construction.

Benefit from Fidelity’s proprietary fundamental research

We have used Fidelity’s wealth of experience in active management to design a cost-effective means for investors to access this expertise, as we believe this is how we can add most value for clients.

Each Fidelity ETF operates a rule-based strategy, like those employed by pure passive solutions, but a key difference is that they can access the wealth of intellectual property and proprietary forward-looking data contained within Fidelity’s extensive global investment platform. This data is informed and updated on an ongoing basis by Fidelity’s broad range of specialist fundamental research analysts operating on the ground across geographies, sectors and value chains around the world.

We believe this differentiates Fidelity’s ETFs from those that cannot access a depth of understanding or economy of scale that our heritage in active investing affords.

Integrating sustainability

We consider sustainable investing a natural component of fundamental analysis, as it involves holistic consideration of the opportunities and risks facing a company or issuer, particularly over the long term. As such, all Fidelity ETFs integrate ESG rules into their investment processes, developed using the wealth of expertise within Fidelity’s global sustainable investing platform.

By way of example, the systematic active Fidelity ETFs leverage Fidelity’s proprietary forward-looking ESG Ratings, which are informed primarily by corporate engagement activity undertaken by bottom-up and dedicated sustainable investing analysts around the world.

While all Fidelity ETFs integrate a minimum level of ESG rules, which would not typically be seen in pure index trackers, the degree to which sustainability considerations are integrated into each ETF’s investment process is to an extent reflected in its SFDR rating. All Fidelity ETFs are either Article 8 or 9 under SFDR.

Understand underlying exposures

When offering investment solutions, it is important to understand each potential client’s objectives. One of the challenges we perceived with many of the ETFs available in the marketplace was that their investment processes could expose investors to unwanted idiosyncratic risks that might prevent their use as core asset allocation building blocks.

For example, many ‘equity income’ ETFs naturally tilt towards lower-growth sectors, as high-growth companies tend to reinvest their profits and, therefore, pay lower dividends. While this is not in itself inherently negative, it can be disadvantageous during periods when the growth investment factor is outperforming due to developments affecting the market backdrop.

While seeking to avoid taking large unintended risks like these, Fidelity ETFs go beyond the simple concept of replication, employing rules-based security selection and portfolio construction processes that operate within defined limits in seeking to mitigate any market-relative biases.

In turn, we believe this allows them to provide clients with what they really want: enhanced beta exposures based on forward-looking research-based investment selection.

We also do not believe that using market capitalisation-weighted index funds as building blocks is necessarily the best way to construct a portfolio or maximise exposure purity. By incorporating fundamental and sustainable research, Fidelity ETFs provide clients with transparent, rules-based building blocks that can provide purer exposures which better meet their requirements.

Product structure

Often when considering an ETF, in particular a pure passive ETF, investors must choose between physical and synthetic index replication. A physical ETF invests in its underlying index’s securities, while a synthetic ETF uses derivatives to replicate exposure to its underlying index. Both methods will deliver different tracking and return profiles while posing their own risks.

Investors need to examine whether physical or synthetic instruments offer the most efficient means of gaining the investment exposure they desire.

For instance, cost factors often make synthetic structures more efficient for gaining exposure to less liquid investments like non-metal commodities and emerging market equities. However, for more liquid markets, physical replication is generally cheaper and superior in terms of purity of exposure.

The liquidity filters inherent within the Fidelity ETFs’ construction processes allow them to follow physical replication processes.

The processes were designed in this manner as we believe that a physical replication approach is most appropriate for the current Fidelity ETF range, given cost considerations and the exposures each ETF seeks to provide.

Another advantage is that by deploying capital physically in this manner, an investor can exert the influence that this approach affords, which is particularly important when it comes to corporate engagement on fundamental or sustainability issues of financial or non-financial importance.

You can learn more about the range of Fidelity ETFs at fidelity.co.uk/etf.

This article was first published in Actives Unlocked: The Next Battleground, an ETF Stream report. To read the full report, request access here.


This is for investment professionals only and not to be relied on my private investors. The value of investments and the income from them can go down as well as up so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Funds that invest in emerging markets which can be more volatile than other more developed markets. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Due to the greater possibility of default, an investment in a corporate bond is generally less secure than an investment in government bonds. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of investments. The investment which is promoted concerns the acquisition of units or shares in a fund and not in a given underlying asset owned by the fund. These funds may have high volatility owing to their portfolio composition or portfolio management techniques. Fidelity funds with a focus on securities of issuers which maintain favourable ESG characteristics or that are sustainable investments may affect some of these funds’ investment performance favourably or unfavourably in comparison to similar funds without such focus. Some share classes may take annual management charges and expenses from your capital and not from the income generated. This means that any capital growth will be reduced by the charge. Your capital may reduce over time if the fund’s growth does not compensate for it. Funds are subject to charges and expenses. Charges and expenses reduce the potential growth of your investment. This means you could get back less than you paid in. The costs may increase or decrease as a result of currency and exchange rate fluctuations. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Fidelity only gives information on products and services and does not give investment advice to retail clients based on individual circumstances. Any comments or statements made are not necessarily those of Fidelity. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1123/384539/SSO/NA 

Featured in this article

Logo for Fidelity International


No ETFs to show.