Fidelity Investments Canada, one of the last major mutual fund companies yet to join the Canadian exchange-traded funds industry, is set to begin trading next week in six ETFs for income-seeking investors, offering a suite of dividend factor-based funds starting Sept. 18 on the Toronto Stock Exchange.
The new funds will be Fidelity Canadian High Dividend Index ETF (FCCD), Fidelity U.S. Dividend for Rising Rates Index ETF (FCRR), Fidelity U.S. Dividend for Rising Rates Currency Neutral Index ETF (FCRH), Fidelity U.S. High Dividend Index ETF (FCUD), Fidelity U.S. High Dividend Currency Neutral Index ETF (FCUH) and Fidelity International High Dividend Index ETF (FCID).
Also known as smart beta or quantitative investing, factor-based funds follow an index but have portfolio managers who can change mandates or investment strategies when needed. The dividend funds track Fidelity's in-house rules-based indexes and focus on three things: payout ratio, dividend growth and dividend yield.
“Factor investing, especially on the dividend side, allows us to complement what we have been doing in our active management suite with our mutual funds,” said Darby Nielson, Fidelity's managing director of research, in an interview with The Globe and Mail. “Many people think of Fidelity as fundamental investment managers, which we largely still are, however we are able to integrate our fundamental insights into our quantitative research and offer it to Canadian investors in a new ETF offering."
FCCD, FCUD and FCID offer investors access to the performance of stocks of large- and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends in each fund's region.
FCRR uses a strategy that targets 100 dividend-paying stocks in the U.S. that tend to perform well in an environment of rising interest rates. Traditional dividend strategies tend to underperform the broader market during such periods, often because they are overweight debt-heavy sectors such as telecommunications, utilities and real estate.
Investors can trade any of the six ETFs separately. Fee-based investors can also purchase any of the funds as an F-class mutual fund.
Mutual fund investors can also opt to purchase all of the funds in a single investment product to be called the Fidelity Tactical Global Dividend ETF Fund.
Management fees for all the ETFs and mutual funds range from 0.35 per cent to 0.45 per cent.
The company – Canada's fourth-largest mutual fund firm, with $136-billion in assets under management – first explored entering the Canadian ETF market in August, 2017. Last January, it hired Raymond James fund expert Andrew Clee as its vice-president of ETFs.
The Canadian ETF market recently surpassed $164-billion in assets under management in more than 750 ETFs among 28 providers.
"[Fidelity is] going to clearly have significant branding and distribution advantages that other mutual fund players will not have, which gives them a big leg up on other new entrants," said Mark Noble, senior vice-president of ETF strategy for Horizons ETFs Management (Canada) Inc., a key competitor. "Their brand is not too far off the brand of the big Canadian banks and insurers in terms of consumer awareness and investor loyalty."
Despite Fidelity's late entrance into the market, Mr. Clee says the firm's strong quantitative research team and commitment to active management will allow it to stand out in the crowd.
"This is still a very young industry – just over one-tenth the size of the mutual fund industry, but flows are almost punching dollar for dollar," he said in an interview. “The pie is only going to keep growing. The key to entering the industry now is about differentiation and portfolio construction. I think we have brought some pretty compelling products to the market, and rising rates is a unique strategy for the Canadian market.”