Fidelity International has entered one of the fastest growing segments in the ETF space with the launch of three actively managed ESG products.

The ETF range looks to differentiate itself by leveraging the firm’s in-house ESG expertise to offer a trio of active products.

Rebalanced quarterly, the three ETFs will typically hold between 250 to 500 stocks and offer exposure to the US, European and global markets.

What the company says:

Nick King, head of ETFs at Fidelity International, commented: “Incorporating sustainable investing principles is a key priority for many of our clients.

“These new ETFs provide an enhanced beta exposure by leveraging both our proprietary ESG ratings and our fundamental research insights to select and weight securities while seeking to capture the characteristics of the broader market.”

What the panel says:

Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence (pictured left)

ESG continues to be an area of tremendous interest for the majority of ETF issuers. It is one of the few ETF categories that continues to steadily take in assets every month despite the coronavirus volatility.

I like the fact they decided to go with the active route, it can be tough to fit ESG cleanly into indexing parameters so this could give them an edge.

Kenneth Lamont, senior research analyst, passive strategies, at Morningstar (pictured centre)

Fidelity’s trio of actively managed ETFs present investors with another range of ESG flavoured portfolio building blocks to assess.

The new entrants adopt an ‘index plus’ approach whereby they attempt to outperform well known equity indices without incurring a large tracking error (a measure of how tightly the fund tracks its index). This allows the fund to be used as a direct substitute for core equity holdings.

The discretion permitted in an active approach to ESG integration allows a flexibility not available to traditional indexed products. It allows the manager to exercise their judgement when selecting and weighting holdings. For example, a holding which scores highly on ESG metrics but is deemed to have poor fundamentals can be easily excluded.

ETF Insight: Can ESG investors do good and avoid underperforming?

One downside of this approach is that it will not always be clear why one stock has been favoured over another. The mix of financial and ESG considerations mean the fund will likely hold some less-ESG compliant stocks which have stronger investment prospects, which will not sit well with all investors.

The fees charged compare favourably with active peers and with ESG-themed strategic beta ETFs, but still sit towards the top end of the range of purely passive core ESG ETFs now available.

Nicolas Rabener, managing director at FactorResearch (pictured right)

It is tough being innovative as an asset manager and often far easier jumping on the moving train. In the case of Fidelity, it is expanding its suite of ETFs by three ESG products to cover European, US, and global stocks.

The portfolio construction is not unique and investors will have to rely on Fidelity's expertise in ESG.

Fidelity emphasised that ESG stocks outperformed in the COVID-19 crisis, which indicates a similar stock selection process as seen in other ESG products, i.e. long technology stocks (think Zoom) and short energy stocks (remember negative oil prices?).

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