Fidelity rolls out three semitransparent ETFs

The new funds showcase the firm's proxy basket technology

Fidelity Investments has become the third asset manager to launch an actively managed ETF in a semitransparent wrapper.

The three new ETFs are modeled after existing mutual funds and use the same portfolio managers as those mutual funds. But because of some structural differences between mutual funds and ETFs, the new ETFs can only be described as “clonish,” according to Greg Friedman, Fidelity’s head of ETF management and strategy.

Fidelity’s launch follows semitransparent ETF launches by American Century in April and ClearBridge Investments in May.

What’s unique about the Fidelity launch is that this marks the first time the unique fund wrapper has been applied using a proxy-basket model to represent the underlying holdings.

Both American Century and ClearBridge licensed the technology from Precidian Investments, which uses a blind trust model to represent the underlying portfolio holdings.

Fidelity and Precidian represent two of the five companies that have received regulatory approval to license technology that enables the actively-managed ETFs to price and trade throughout the day while only reporting portfolio holdings on a quarterly basis like a mutual fund.

In addition to its own suite of funds, Fidelity is also anticipating a robust licensing business.

Goldman Sachs has already signed up to license Fidelity’s technology, and Friedman said 10 other asset managers have signed non-binding letters of intent.

“Our goal is to be a leader in this space,” he said. “We want Fidelity to be synonymous with active equity ETFs.”

To that end, Fidelity has filed with the Securities and Exchange Commission for exemptive relief to allow semitransparent ETFs for non-US equity and fixed income.

Currently, the SEC only allows semitransparent ETFs to invest in securities that trade at the same time the ETF is trading, which essentially limits the underlying investments to domestic stocks.

“I’m optimistic about it,” Friedman said. “I’ve been doing ETFs since 1996 and it’s always walk before you can run with the SEC. They want to see how these things work.”

Todd Rosenbluth, director of mutual fund and ETF research at CFRA, said the Fidelity brand will have a powerful impact on the growth of the new semitransparent wrapper.

“Fidelity has a well-established record of generating strong risk adjusted performance with active strategies as well as a prominent brand in the ETF market,” he said. “While the actively managed equity share remains small, Fidelity is likely to generate high interest among investors that seek the tax benefits and liquidity ETFs offer.”

The three new semitransparent funds are Fidelity Blue Chip Growth ETF (FBCG), Fidelity Blue Chip Value ETF (FBCV) and Fidelity New Millennium ETF (FMIL).