Fidelity Seeks SEC Approval to Start Its First Smart-Beta ETF

  • Firm applies to make funds based on proprietary indexes
  • Fidelity's self-indexing ETF would select value stocks

Fidelity Investments is seeking permission to offer exchange traded funds that track customized indexes, providing the firm with an entree into the fastest growing sector of the ETF market.

The Boston-based fund manager filed an application with the U.S. Securities and Exchange Commission on Friday to offer what are known as self-indexing ETFs. These funds follow a proprietary index developed by the manager instead of tracking an outside benchmark, such as the Standard & Poor’s 500 Index.

Fidelity was a latecomer to ETFs, ignoring them for years as rivals including BlackRock Inc., State Street Corp. and Vanguard Group amassed billions of dollars in the funds, which are mostly passive products that track broader markets. Packaging its stock and bond-picking methods into a customized index would permit Fidelity to tap growing demand for what are known as smart-beta ETFs.

“This makes a lot of sense” for Fidelity, said Eric Balchunas, an ETF analyst at Bloomberg Intelligence. “They would be able to take their secret sauce and turn it into” a smart-beta ETF.

Fidelity currently offers eleven index ETFs with about $2.7 billion in assets, and three actively managed bond ETFs with some $450 million under management. Fidelity runs the bond ETFs and subcontracts with BlackRock for day-to-day management of the passive ETFs, which track indexes licensed from MSCI Inc.

Fidelity’s initial self-indexing ETF would reflect the performance of U.S. large and mid-cap stocks “that have attractive valuations,” as determined by the firm’s proprietary methodology, according to the SEC application. Charlie Keller, a Fidelity spokesman, said the firm made the latest application to obtain additional flexibility in the ETF market.

“This gives us the ability to launch additional passive ETFs in the future, but we don’t have anything to announce at this time,” Keller said in an interview. “It’s really just bringing us in line with the industry.”

Many firms have applied for clearance to set up self-indexing ETFs, including smart-beta versions, since the SEC eased the requirements for such funds in 2013, said James Simpson, the president of ETP Resources, an industry consultant.

First offered by firms such as WisdomTree Investments Inc., smart beta ETFs have more than doubled in size to $410 billion since the end of 2012, said Balchunas, the analyst. The ETF market as a whole has grown about 59 percent to $2.15 trillion over the same period, he said.

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