Fidelity International has launched two income-focused smart beta ETFs on the London Stock Exchange, becoming the latest asset manager to enter the European ETF space. The Fidelity Global Quality Income UCITS ETF (FGQI) and Fidelity US Quality Income UCITS ETF (FUSD) track proprietary in-house indices to provide exposure to high quality companies with attractive dividend yields within the global and US stock universes respectively.
Nick King, Head of ETFs at Fidelity International.
According to Fidelity, the ETFs combine the firm’s active investment expertise with the systematic aspects of passive investing. The funds have been designed to cater to investors seeking quality yields in excess of the broader market whilst, at the same time, carefully managing risk through sector, country and security diversification. The theory underpinning such strategies is that higher quality companies with stable earnings and cash flows have a better opportunity to outperform over time.
Nick King, Head of ETFs at Fidelity International, commented: “Fidelity International is focused on providing world class investment solutions. Demand for smart beta strategies has been growing in recent years and is expected to continue to accelerate as investors look for competitively priced, differentiated products which provide a particular investment outcome. This is an area we believe our proven research capabilities and expertise can add value and increased choice for our clients.”
FGQI tracks the Fidelity Global Quality Income Index and has a total expense ratio (TER) of 0.40%. The starting universe for the index is the largest 2000 global stocks based on float-adjusted market capitalization. Any security with no dividend yield, an excessively high payout ratio, or negative five year dividend growth is excluded. Constituents are evaluated according to quality factors with each security receiving a composite score based on an equal-weighted combination of their z-scores across three factors (cash flow margin, return on invested capital and free cash flow stability). The bottom half of the ranked securities are subsequently excluded.
Remaining constituents are assigned a size-adjusted dividend composite score by multiplying their trailing 12-month dividend yield by a measure of their company size. Approximately 250 of the highest ranked stocks are selected for final inclusion with the methodology allowing for country, sector, and stock diversification by employing a sector/size-adjusted market cap weighting scheme.
The fund currently has significant country exposure to the US (60.4%), Japan (8.3%), the UK (5.8%), Switzerland (4.2%) and Australia (3.0%). The largest sector exposures are to financials (17.6%), information technology (15.2%), industrials (12.1%), healthcare (12.1%) and consumer discretionary (11.6%). The largest single holding is Apple at 2.2%. (Data as of 27 March 2017)
FUSD tracks the Fidelity US Quality Income Index which follows a similar methodology to FQGI’s underlying index but uses the 1000 largest US stocks as its starting universe and seeks to ultimately select approximately 125 stocks for final inclusion.
The largest sector exposures of FUSD are to information technology (21.4%), financials (14.4%), healthcare (13.3%), consumer discretionary (12.4%) and industrials (10.3%). The largest constituent is also Apple at 3.7%.
The fund comes in a little cheaper than FGQI with a TER of 0.30%.
The ETFs are the first smart beta funds the firm has listed globally. Its US-listed ETFs primarily consist of factor and sector fund suites.
“Our first smart beta ETFs will track Fidelity-branded indices which leverage our experience in security analysis and portfolio construction,” said King. “By combining our active investment expertise with the systematic aspects of passive investing, we believe we can offer a truly differentiated product.”
Fidelity is the 26th exchange-traded product provider to launch an ETP on the London Stock Exchange. In addition to the London listings in USD or GBP, the funds have also been rolled out on Deutsche Boerse for trading in EUR.
Pietro Poletto, Global Head of Fixed Income Products at London Stock Exchange Group, said: “We are delighted that Fidelity has become the latest ETF issuer to list products in London, responding to the increasingly strong demand from European investors. London Stock Exchange is a leading ETF trading venue in Europe and working with market participants, we hope to continue to build on this position by encouraging new issuers and products to market.”