Powering active ETFs with next-gen technology

Fidelity Optimus is a proprietary portfoliomconstruction and optimisation tool

4 carbon transition

There has been a marked change in sentiment within the mutual fund industry amid near-universal expectation that demand for UCITS ETFs will continue to increase over the coming years.

Within this space traditionally dominated by cheap passive funds, active ETFs are now promising to act as cost-effective complements, alongside active mutual funds.

However, there is still no ubiquitous definition of what ‘active’ means in relation to ETFs and investors must therefore act diligently when accessing this expanding segment of the market.

What do we mean by ‘active ETFs’?

For many investors, active ETFs are simply defined as those that are not passive, i.e. those that do not seek to track the returns of an underlying reference benchmark.

However, we do not view this broad definition as particularly useful, as there are many variables to consider when classifying an active ETF.

In our view, the definition should include the application of in-depth, proprietary research in the pursuit of benchmark outperformance, but also the requirement to deliver the diversification, low tracking error, and cost advantages that ETF investors typically expect.

When our clients ask for active ETFs, we believe they mean funds that:

  • Provide cost-effective market access.

  • Use of proprietary bottom-up research insights to generate alpha.

  • Deliver ‘index-aware’ exposures that avoid large benchmark-relative macro factor bets.

Access to Fidelity research To deliver these characteristics, our active equity and fixed income ETFs start with common reference indices (like the MSCI World index) to define their investment universes.

Our portfolio managers then use technology to access the vast volume of proprietary research produced by our global team of expert analysts drawing insights from this research via systematic investment selection and capital allocation processes to over- or underweight individual investments within each portfolio.

This tilts them towards securities that our analysts rate positively in terms of their fundamental and sustainable characteristics, ensuring that the portfolios are dominated by securities that they rate ‘strong buy’ or ‘buy’.

Our analysts’ interests are aligned with those of our investors by compensation arrangements tied to the performance of their ratings over time.

This makes their research a unique resource that cannot easily be reproduced within the marketplace.

The benefits of an index-aware approach

While our active ETF clients expect us to use our proprietary investment insights to deliver superior exposures versus pure index trackers, they also want diversified exposures that avoid the large benchmark-relative factor risks to which many funds are exposed.

We have therefore designed them as ‘index aware’ portfolios, meaning that they seek to match the broad macro factor exposures of their underlying reference benchmarks as closely as possible, without compromising their ability to benefit from active investment selection.

As their investment processes start with commonly-used reference benchmarks, these provide templates to target in terms of their aggregated macro exposures (in relation to factors like sector, geography and market capitalisation, etc.).

Our optimisation technology allows our ETFs to match these exposures closely by adjusting the weightings of their underlying investments.

In turn, this allows security selection to be maximised as the key driver of relative returns; after all, bottom-up investment selection is where our primary competitive advantage lies.

Delivering cost-effectiveness

Delivering diversified index-aware ETFs that incorporate in-depth bottom-up research is potentially a very expensive process.

However, our ETFs benefit from significant cost savings due to:

  • The economies of scale that our proprietary technology platform provides.

  • The fact that many of the key research, trading, regulatory and other implementation inputs they require are already in place across our business.

On top of this, our optimisation processes ensure the cost-efficient delivery of alpha by striking a balance between implementation and investment management costs.

For example, they allow portfolio rebalancings to be scheduled when our systematic portfolio managers believe they will be most cost-effective, which is often just after periods of concentrated analyst rating updates (such as after major market events).

They also allow the efficient management of inflows to and outflows from ETFs, with market makers often offering quasi-matching inventories of underlying securities from/to their own books to facilitate flows and reduce trading costs. These kinds of processes help to ensure that the portfolios are positioned appropriately on an ongoing basis, while also managing ongoing implementation costs.

Powering active fixed income ETFs with award-winning technology

Fidelity Optimus is an award-winning proprietary portfolio construction and optimisation tool that allows the elegant incorporation of Fidelity research insights into fixed income investment portfolios.

Designed with our fundamental, ESG and quantitative research at its heart (across credit, equity, macro and trading) it is the ideal platform from which we manage a range of tailored solutions like our active ETFs for clients.


Important information

This material is for Institutional Investors and Investment Professionals only and should not be distributed to the general public or be relied upon by private investors. Past performance is not a reliable indicator of future returns. 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 an investment in overseas markets. Investments in emerging markets 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. 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 the Fund investing in them. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. Fidelity ETFs can use financial derivative instruments which may result in increased gains or losses within the fund. These funds may have or are likely to have, high volatility owing to their portfolio composition or portfolio management techniques. The ETF tracks an equity index and as a result the value of the fund may go down as well as up. Performance data is based on the net asset value (NAV) of each ETF, which may not be the same as the market price of the ETF. Individual shareholders may realise returns that are different to the NAV performance. Funds are subject to charges and expenses. Charges and expenses reduce the potential growth of investments. There is no guarantee that the investment objective of any Index Tracking Sub-Fund (passively managed) will be achieved. The performance of a sub-fund may not match the performance of the index it tracks due to factors including, but not limited to, the investment strategy used, fees and expenses and taxes. The Investment Manager’s focus on securities of issuers which maintain sustainable characteristics may affect the fund’s investment performance favourably or unfavourably in comparison to similar funds without such focus. The sustainable characteristics of securities may change over time. 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 +44 0800 368 1732. Europe: Issued by FIL Pensions Management (authorised and regulated by the Financial Conduct Authority in UK), FIL (Luxembourg) S.A. (authorised and supervised by the CSSF, Commission de Surveillance du Secteur Financier), FIL Gestion (authorised and supervised by the AMF (Autorité des Marchés Financiers) N°GP03-004, 21 Avenue Kléber, 75016 Paris) and FIL Investment Switzerland AG.


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