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ETFs Understanding
Citation preview
1 1
Understanding
Exchange Traded Funds
Presented by
Paul Baiocchi Director, Sector Investment Strategy
September 9, 2015
2 2
AGENDA
• What is an ETF/ETP?
– ETF basics
– ETFs vs. mutual funds
– Different ETF structures
• The ETF Market
– By asset class
– By issuer
– Trends
• Fidelity’s ETF Ecosystem
– Fidelity’s ETF products
– Fidelity’s ETP tools and resources
3
What is an ETF/ETP?
4
What is an ETF? ETF Basics: Know Your Tickers
• An ETF is an evolution of the mutual fund which: – Trades intraday
– Typically discloses holdings daily
– Can be optioned, shorted, or margined
– Potentially more tax efficient
5
ETF
Shareholder
Broker/Dealer
Market Maker/Authorized Participant
Demand exceeds supply of ETF shares on Secondary Market
What is an ETF? ETFs vs. Mutual Funds
Mutual Fund
Stock Market
Shareholder
Mutual Fund
1
2
3
ETF
Stock Market
Authorized Participant
Basket of Securities
1
2
ETF Shares
3
3 Mutual fund shares are delivered to the shareholder @ NAV
Shareholder sends cash to the mutual fund directly 1
Mutual fund purchases securities from the market 2
AP acquires the basket of securities from the market
AP delivers the basket and cash to the ETF 2
ETF delivers ETF shares @ NAV to AP 3
1
6 6
What is an ETF? Traditional Mutual Fund Purchase Process
Shareholder sends cash to the mutual
fund directly 1
Mutual fund shares are delivered to the
shareholder @ NAV 3
Mutual fund purchases securities from
the market 2
Mutual fund trades are taxable
events to the fund
Mutual Fund
Stock Market
Shareholder
Mutual Fund
1
2
3
7 7
Scenario 2 Scenario 1
What is an ETF? ETF Share Purchase Scenarios
Supply of ETF shares on Secondary Market
satisfies demand
Create Required: Demand exceeds supply of ETF shares
on Secondary Market
ETF
Stock Market
Shareholder
Broker/Dealer
Market Maker
Authorized
Participant
$
$ Primary
Market
$
MP
MP
NAV
SEC
MP $
BOS
Seco
nd
ary
Mark
et
Shareholder
Broker/Dealer
Market Maker
$
$
MP
MP
Se
co
nd
ary
Ma
rke
t
KEY
Individual Securities SEC
Basket of Securities BOS
Cash
ETF Shares at Market Price
ETF Shares at NAV
$ MP
NAV
8
ETFs
What is an ETF? Comparing ETFs and Mutual Funds
MUTUAL FUNDS
Costs Expense Ratios
Commissions
Bid-Ask Spreads
Premiums/Discounts to NAV
Expense Ratios
Load and No-load funds
Bought/Sold at NAV (may have redemption fees)
Bought/Sold at NAV (no load funds)
Trading
Attributes
Intra-day trading on secondary Market
Allows Limit, Stop and Conditional Orders
Allows Shorting and Margin
Most transact once a day at close
No Stop, Limit or Conditional Orders
No Shorting (Margin 30 days)
Access,
Transparency
& Taxes
Many sub-sector and industry-focused ETPs in addition to broader market ETPs
Transparency of all holdings nightly
Cap gains tend to be lower because of Create/Redeem
Most funds focus on broader
markets; few sub-sector funds
Holdings data usually at least 1 month old
Less tax efficient structure, all shareholders bear tax burden
9 9
Expense Ratio
What is an ETF? The Full Cost of Ownership
Bid/Ask Spread
Commission/Trading Fee
Taxes
Tracking Error/Alpha
Bid is the price at
which one can sell.
Ask is the price at
which one can buy.
Additional costs
are incurred as
the bid/ask
spread widens.
In this case, the
opening value of
the underlying
basket is above
the ask.
Image for illustrative purposes only.
10 10
Risks: Biggest Does Not Mean Best
Source: Bloomberg as of 7/31/15. Performance data shown represents past performance and is no
guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or
loss when shares are sold. Current performance may be higher or lower than that quoted.
-20%
0%
20%
40%
60%
80%
100%
120%
140%
Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
iShares China Large-Cap ETF (FXI)
iShares MSCI China ETF (MCHI)
Powershares Golden Dragon China Portfolio (PGJ)
SPDR S&P China ETF (GXC)
Ticker AUM (MM)
PGJ $193
MCHI $2,043
GXC $1,054
FXI $6,594
11 11
What is an ETP? Different Exchange Traded Product Structures
Grantor Trusts Partnerships ETNs
Traditional ETFs
• Are unsecured debt obligations of the issuer
• Tend to focus on commodities and currencies
• Investor assumes the credit risk of the ETN issuer
• ETNs do not provide an ownership interest in any underlying assets
• Are open-end registered investment companies
• Can be either index or actively managed (most are index)
• Can hold different types of securities
• Most ETFs use this structure
• Trust’s holdings typically do not change
• Often used for Commodity & Currency ETPs
• Many hold physical commodities or currencies, but can hold securities
• Mostly used for Commodity ETPs
• Often used for ETPs that invest in futures contracts
• Investors treated as partners for tax purposes and receive a Schedule K-1
12 12
Risks: True Cost
Source: Morningstar, Bloomberg as of 7/31/15.
0.95%
0.79%
0.51%
0.40%
0.28% 0.26%
0.23%
Alternative Allocation Commodities Convertibles Equity Tax Preferred Fixed Income
Asset Weighted Expense Ratio
Not All Expense Ratios are Created Equal
13 13
ETF Trading Spreads
Source: SSgA
TOTAL COST OF BID/
ASK SPREAD
ETF
Spread
Ask Price Market Maker P&L
Creation Costs
Forex Hedging Costs
Taxes
Brokerage Fees
Underlying
NAV Underlying Bid/Ask
Brokerage Fees
Taxes
Forex Hedging Costs
Redemption Fees
Bid Price Market Maker P&L
Spre
ad
Creation/
Redemption Fee
Cost to Gather
Underlying Securities
Cost of Risk
$
$
$
14
The ETF Market
15 15
AU
M The ETF Market
Growing Rapidly: 24% CAGR Over the Past 10 Years Ju
n-0
5
De
c-0
5
Ju
n-0
6
De
c-0
6
Ju
n-0
7
De
c-0
7
Ju
n-0
8
De
c-0
8
Ju
n-0
9
De
c-0
9
Ju
n-1
0
De
c-1
0
Ju
n-1
1
De
c-1
1
Ju
n-1
2
De
c-1
2
Ju
n-1
3
De
c-1
3
Ju
n-1
4
De
c-1
4
Ju
n-1
5
$-
$500
$1,000
$1,500
$2,000
$2,500
Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over
a specified period of time longer than one year.
Source: Morningstar as of 6/30/15 AUM ($B)
Now more
than
$2 trillion
in AUM
16 16
AU
M The ETF Market
Growing Rapidly: Equities Still Dominate, but Fixed Income Growing
Source: Morningstar as of 6/30/15
Bond
ETFs now
15% of
ETF AUM
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jun-0
5
De
c-0
5
Jun-0
6
De
c-0
6
Jun-0
7
De
c-0
7
Jun-0
8
De
c-0
8
Jun-0
9
De
c-0
9
Jun-1
0
De
c-1
0
Jun-1
1
De
c-1
1
Jun-1
2
De
c-1
2
Jun-1
3
De
c-1
3
Jun-1
4
De
c-1
4
Jun-1
5
Municipal Bond
Allocation
US Equity
Taxable Bond
Sector Equity
International Equity
Commodities
Alternative
17
The ETF Market The “Big Three” Dominate
• Responsible for 80% of ETF AUM
• Sponsor 18 of the top 20 ETFs by AUM
• Provide predominantly low-cost, passive exposure to core assets classes
June 2015
League Table
AUM by Issuer
Division Name
Issuer June 2015 AUM ($B)
Blackrock 807
Vanguard 477
SSgA 419
Total 1,702
18 18
The ETF Market Beyond the “Big Three”, Other Issuers Offer Choice
$11
$12
$19
$21
$25
$31
$35
$39
$63
$92
ALPS
PIMCO
Deustchebank
Market Vectors
ProShares
Guggenheim
Charles Schwab
First Trust
WisdomTree
PowerShares
AUM ($B)
Source: Morningstar as of 6/30/15
Smaller Issuers
Providing
Focused, Nuanced
Exposure
19
The ETF Market
Trends to Watch
• Smart/Strategic Beta
– Passive Indexes focused on Factors
• Currency Hedged – Removing currency movements from foreign equity exposure
• Active Fixed Income – Tapping into manager expertise and leverage scale
• Sector Rotation – Using Sector ETFs to rotate among economic sectors
20
Fidelity’s ETF Ecosystem
21 21
Fidelity ETFs Fidelity Sector ETFs
Why Fidelity
Sector Index ETFs?
Bringing together Fidelity’s asset management
expertise and BlackRock’s infrastructure, the
Fidelity MSCI Sector Index ETF suite provides
world class comprehensive, transparent, and
efficient exposure to all 10 sectors of the market.
1 Free commission offer applies to online purchases of Fidelity ETFs in a Fidelity brokerage account with
a minimum opening balance of $2,500. The sale of ETFs are subject to an activity assessment fee (of
between $0.01 to $0.03 per $1000 of principal) by Fidelity. After 02/01/2014, Fidelity ETFs are subject to
a short-term trading fee by Fidelity, if held less than 30 days.
Purchase Information
Net Expense Ratio: 0.12%
Stock Exchange: NYSE Arca
Fidelity Trading Fees1: Purchase commission Free/30-day
short-term trading fee1
FDIS Fidelity MSCI Consumer Discretionary Index ETF
FSTA Fidelity MSCI Consumer Staples Index ETF
FENY Fidelity MSCI Energy Index ETF
FNCL Fidelity MSCI Financials Index ETF
FHLC Fidelity MSCI Health Care Index ETF
FREL Fidelity MSCI Real Estate Index ETF
FIDU Fidelity MSCI Industrials Index ETF
FTEC Fidelity MSCI Information Technology Index ETF
FMAT Fidelity MSCI Materials Index ETF
FCOM Fidelity MSCI Telecommunication Services Index ETF
FUTY Fidelity MSCI Utilities Index ETF
Tickers and Fund Names
22 22
Fidelity ETFs Fidelity Active Fixed Income ETFs
Fidelity Limited Term
Bond ETF (FLTB)
Fidelity Total Bond ETF
(FBND)
Fidelity Corporate Bond
ETF (FCOR)
AUM: $142.9M
30 Day SEC Yield: 1.17%
Effective Duration: 2.81 years
AUM: $104.4M
30 Day SEC Yield: 3.37%
Effective Duration: 5.35 years
AUM: $29.4M
30 Day SEC Yield: 3.43%
Effective Duration: 6.86 years
Summary
A credit oriented strategy serving
clients with shorter investment
horizons
The multi sector approach reflects
some of the capabilities Fidelity
has to offer and brings a depth
and breadth of resources to
serve client needs
A credit oriented strategy
serving clients with longer
investment horizons
Cost
• Expense Ratio: 45 bps
• Commission Free Trading
• Expense Ratio: 45 bps
• Commission Free Trading
• Expense Ratio: 45 bps
• Commission Free Trading
DURATION SPECTRUM
SHORTER LONGER
Assets noted are as of 06/30/2015. Information presented, including 30 day SEC yield,
effective duration, and fee are as of 07/16/2015. Source Fidelity Investments.
22
23 23
Fidelity’s Commission Free ETF Platform Fidelity’s Platform Offers Both Active & Passive ETFs
Our ETF Strategy Seeks to Deliver
Innovation
Choice
Value
• iShares® ETFs – choose
from 70 iShares® with broad
and diverse asset classes
• Fidelity 11 sector ETFs with
some of the lowest expense
ratio in the industry
• Buy online commission-free
all 70 iShares® ETFs,
Fidelity sector ETFs &
Fidelity active ETFs
• Active ETFs – with the
launch of 3 Fidelity Active
Fixed Income ETFs, Fidelity
is poised to be a leading
innovator in the active ETF
space
Free commission offer applies to online purchases of Fidelity ETFs and select iShares ETFs in a Fidelity brokerage account. Fidelity accounts may require minimum balances. The sale of ETFs is
subject to an activity assessment fee (of between $0.01 to $0.03 per $1,000 of principal). iShares ETFs and Fidelity ETFs are subject to a short-term trading fee by Fidelity if held less than 30 days.
Strategic Insight Simfund/FI Desktop, data as of 07/31/2013. Based on a comparison of total expense ratios for U.S. sector-level ETFs with similar holdings and investment objectives (using the MSCI
and S&P Global Industry Classification System — GICS) within the universe of 298 ETFs Morningstar has classified as the Sector Stock asset class.
For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and
inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation is described in the ETF’s prospectus and
related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc. and its affiliates.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold
at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
24 24
Fidelity’s Commission Free ETF Platform Finding Commission Free ETFs
Look for the
Commission Free
Logo in your ETF
Screen
1 Free commission offer applies to online purchases of Fidelity ETFs and
select iShares ETFs in a Fidelity brokerage account. Fidelity accounts
may require minimum balances. The sale of ETFs is subject to an
activity assessment fee (from $0.01 to $0.03 per $1,000 of principal).
iShares ETFs and Fidelity ETFs are subject to a short-term trading fee
by Fidelity if held less than 30 days.
For illustrative purposes only.
25 25
For illustrative purposes only.
Fidelity’s ETF Tools and Resources ETF/ETP Research
25
26 26
Fidelity’s ETF Tools and Resources ETF/ETP Research—Landing Page
• Quickly start a screen using the 4
available tabs:
Geography/Region
Country
Sector, or
Asset Class
For illustrative purposes only.
• The landing page has a variety
of tools and resources available:
For example, you can quickly:
Track the market
Locate an ETP by holdings
Read expert ideas
View the top ten ETPs
27 27
Fidelity’s ETF Tools and Resources ETF/ETP Research Highlights
• ETF Screener and Market Tracker
• Find ETFs by Basket Holdings
• Top 10 ETP Lists
• ETF Education and 3rd Party Research
& Commentary
• ETF Portfolio Builder
28 28
Fidelity’s ETF Tools and Resources Live Support
800.544.5115
to speak with one of our knowledgeable
representatives
a Fidelity Investor Center
for a consultation with one of our investment
professionals
Tell us how we can help you today.
CALL VISIT
You Have Access to Even More Resources
29 29
Diversification does not ensure a profit or guarantee against loss.
Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market,
or economic developments.
Free commission offer applies to online purchases of Fidelity ETFs and select iShares ETFs in a Fidelity brokerage account which
may require a minimum opening balance of $2,500. The sale of ETFs is subject to an activity assessment fee (from $0.01 to $0.03 per
$1,000 of principal). iShares ETFs and Fidelity ETFs are subject to a short-term trading fee by Fidelity if held less than 30 days.
Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks
associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to
interest rate, currency-exchange rate, economic, and political risks, all of which are magnified in emerging markets. Exchange-traded products
(ETPs) that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility, as
well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment
strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees,
expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of
exchange-traded notes). Each ETP has a unique risk profile, which is detailed in its prospectus, offering circular, or similar material, which
should be considered carefully when making investment decisions.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses.
Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually
redeemed from the fund.
The S&P 500 Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group
representation to represent U.S. equity performance.
Important Information
30 30
The percentage of fund assets used to pay for operating expenses and management fees, including 12b-1 fees, administrative fees, and all
other asset-based costs incurred by the fund, except brokerage costs. Fund expenses are reflected in the fund's NAV. Sales charges are not
included in the expense ratio.
Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and companies.
Nondiversified sector funds may have additional volatility because they can invest a significant portion of assets in securities of a small number
of individual issuers.
Because FMR concentrates the funds’ investments in a particular industry, the funds’ performance could depend heavily on the performance of
that industry and could be more volatile than the performance of less concentrated funds and the market as a whole.
The funds are considered nondiversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund; thus
changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a more diversified fund.
Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives,
risks, charges, and expenses. Contact Fidelity for a prospectus, offering circular, or, if available, a summary
prospectus containing this information. Read it carefully.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
733779.1.0
Important Information