If you're anxiously awaiting Fidelity Investment's foray into the exchange-traded fund world, you may have to take a deep breath.
The company received the OK from the Securities and Exchange Commission to launch actively managed ETFs in May and is working out the kinks in corporate-bond and mortgage securities ETFs it has proposed to offer, Ron O'Hanley, president of asset management at Fidelity, said last Friday at the Morningstar Investment Conference in Chicago.
At the heart of the problem is concern about how the funds would be affected during any upheavals in the bond market, Mr. O'Hanley said.
“Active bond ETFs haven't been tested under stress yet,” he said. “We've still got some stress testing to do.”
Even though ETFs have been raking in assets for the last decade, actively managed versions of the funds are still rare. The $4.77 billion Pimco Total Return ETF (BOND), by far the most popular actively managed ETF, was launched in March 2012. More than half of all ETF sponsors currently are planning actively managed bond ETFs, according to a report by Cerulli Associates Inc.
Mr. O'Hanley is particularly concerned about how actively managed bond ETFs will perform under stress because broker-dealers have been shedding their bond inventories since the financial crisis.
“Broker-dealers have all turned into brokers,” he said.
The average broker-dealer held around $250 billion in corporate bonds before the crisis; today, the average is around $40 billion.
“If B-Ds are unwilling to buy in times of stress, the markets will become less efficient,” Mr. O'Hanley said.
That concern already has affected the way Fidelity's bond mutual funds are managed. Fidelity is still keen to figure out how extra stress would affect an ETF, which is traded intraday on an exchange.
But even with those concerns, Mr. O'Hanley is excited about the potential of ETFs.
“We've seen the end of Chapter One in ETFs, but there's a lot more to come,” he said. “We think active will be a big part of that. There are a lot of opportunities to put active strategies in an ETF form.”
In addition to actively managed bond ETFs, Fidelity is also rumored to be planning ETF versions of its
select sector mutual funds. Nothing official has been filed yet.
Overall, Fidelity has $1.6 trillion in actively managed funds, according to Lipper Inc.
