Fidelity ETF Exchange with Brendan Sims

Announcer: Hello and welcome to the Fidelity ETF Exchange – powered by FidelityConnects –connecting you to the world of investing and helping you stay ahead.

In this episode of the fidelity ETF exchange, host Étienne Joncas Bouchard welcomes Brendan Sims to the show. Brendan is an alternative investment strategist at Fidelity Canada. Etienne and Brendan take a deep dive into the world of alternative investing. They discuss various types of alternative investment strategies, the growth of alternatives via ETFs. What are some of the trends to expect and where cryptocurrency fits into the bigger picture?

This podcast was recorded on February 28th, 2024.

Étienne Joncas-Bouchard [00:00:53] Hello, everyone, and welcome to the fidelity ETF exchange. I'm your host at Sha, aka EJB, and we're very glad to be back today with for another episode of our great ETF podcast. And I guess this is a interesting second time we're in studio. We have no video today, but we are recording in a professional studio, so hopefully it sounds much better than when I'm actually sitting in my basement and recording this. But jokes aside, I think it's it's great to be back here and have, a conversation with a very special guest that's joining us today from our team before I actually introduce that person. Quick recap, as always, of our previous episode, which we did early in the year to recap the, 2023 industry trends for the Canadian ETF industry.

I did that with Andre Bruno, who is one of our recurring guests on the show. We chatted about, flows. We chatted about, you know, performance of various asset classes. But most importantly, I think we had a bit of an outlook for what to expect in terms of trends for the upcoming year. If you'd like to listen to that, you can find it on fidelity, aka your favorite podcast app. So just go under fidelity ETF exchange. You should be able to find that fairly easily. So without further ado, introduction of our guest today, Brendan Sims. Brendan is a strategist here at Fidelity Investments. He's been in the role for a bit more than a year now. He is very well-rounded. On the topic of the alternative industries, alternative investing, as well as, you know, kind of we're going to bring him into the dark side, if you will, bring talking about ETFs a little bit and the impact of alternative investing in that space. Albeit it's been traditionally more on the fun side. You know, we're seeing a lot more of a gray area as we go forward. So we thought it was a great time to get his perspectives. Also, considering we launched some new products in that space. So, Brandon, with that, welcome to the.

Brendan Sims [00:02:44] Show, Adam. Thank you very much for having me on the show. It's a pleasure to be here, and I look forward to chatting for the next 20, 30 minutes.

Étienne Joncas-Bouchard [00:02:49] Absolutely. Great. Well, before we we get started into the the meat of the topic, if you will, I want people to get a better understanding, what it is that you do here at fidelity, kind of. What does your day to day look like? Maybe a bit of your background. You know, how you got into this role? And I think that'll help the conversation to, you know, to get to get started.

Brendan Sims [00:03:09] So of course. So I mean, when you look at what I do day in, week in, week out, monthly, quarterly, it really just snowballs. I think at a high level, what I do is I support our 60 wholesaling teams across the country, and that's their partnerships with our advisor clients across Canada. So one week, it might mean a road trip supporting someone in one of the regional territories. I know you came in from Montreal just last night to help. That said, we do have a large group here in Ontario, so it's office get often getting out on the road, branch presentations, meeting with advisors who are currently invested the space or potentially those who are looking to learn more, and grow their business within the alternative asset space.

Étienne Joncas-Bouchard [00:03:46] Okay. So, somewhat of a subject matter expert, type type role. And I think it's it's also fairly similar to kind of what I do on the ETF side, you know, provide insights on, various parts of the OTS in this industry, if you will, obviously, including what we do here at fidelity, but also providing educational, you know, insights, if you will.

Brendan Sims [00:04:05] And that's just it. Right? So it's an ever changing landscape. Not too fast forward too far into our script here, but it's in response to there is.

Étienne Joncas-Bouchard [00:04:12] No script.

Brendan Sims [00:04:12] Changes brought about in 2019, whereby CSA amended the national interest governs fidelity, in the various solutions which we can bring forth to retail investors. I think that that was sort of the genesis of this role and my support to our various advisor partners and our wholesaling teams. Alternatives are net new in the space. I mean, they're three, four years old to the average retail investor, and I think that's still very new in their life cycle. So I think that having someone or a subject matter expert, if you would, to declutter what is a very quickly growing and busy space, is definitely a necessity at this point in time.

Étienne Joncas-Bouchard [00:04:49] It's really interesting. And I think before we can get into kind of what's happening right now, you know, you bringing up kind of the it's relatively new in the space, right. And in Canada investing for retail investors. Is this something that's, you know, been around for a while, whether it's from an institutional standpoint? And by that I mean alternative investing. Having that growth, if you will, on the retail side, is that are we in the first inning, second inning or, you know, are we now in a, in a in a space where it's getting a bit more mature, there's more product offerings, there's more, different types of strategies and things like that. Or, you know, where do we find ourselves right now?

Brendan Sims [00:05:30] I'd say yes and yes. Like we're probably somewhere between the second and the fourth not to put a number to it. But that said, I, I do think that these innings can last for different periods of time. How do things change over the course of a calendar year and so on and so forth? I do think that this is sort of it reminds me a lot of where ETFs were at, let's say. 5 to 10 years ago, whereby there's a ton of buzz, there's a ton of questions, but yet they're not yet in every portfolio. Yep.

Fast forward to 2024 today. We know how the narratives played out for ETFs. So just to touch on a brief stat, I mean, in quantifying the Canadian landscape, it's tough to do. Third party data providers have yet to sort of wrap their head around what we're formally offering them, random or M-type products today as liquid alternative offerings. To sort of quantify what does the m a m of the space and how is it growing? But conservatively, we would say that over the last three, three and a half years, it's almost quadrupled in size from about just sub 10 billion in size to about 37 to 40 billion, where it would sit today. Based on our calculations. So what I would say is that sort of a growth trajectory that you don't want to get in front of. You want to participate? Absolutely.

So if you're looking to, again, sports guy numbers guy, if you're looking to sort of go to where the puck is going, if you're looking to attract new clients, through a differentiated practice or retain top clients, ensure that they stay with you for years to come. I do think that using alternatives in one's practice are they're just simply tools that can allow you to achieve objectives that you might not able to be able to do so conventionally through a traditional long stock or bond offering.

Étienne Joncas-Bouchard [00:07:05] I love that you mentioned tools that are now part of this, you know, toolbox for advisors, for investors. Can you describe those two a little bit. So basically we kind of jumped the gun a little bit because we've been talking about alternatives. But you know, for for some you know, listening in right now might wonder exactly what is alternative investing. What are these types of strategies. Basically what what am I getting, when we're talking alternatives. And I know that creates the I'm opening a can of worms to a certain extent here where there's so many different types of strategies. But, you know, if you could kind of give us your description of how you see alter investing, like what is it.

Brendan Sims [00:07:38] By tough one answer, but I do my best. So by classification, a liquid alternative solution in the Canadian landscape, it adheres to a long list of rules and regulations which it would prescribe to. But I would say that the second something, uses short selling, whether it's on that of stock or bond in a meaningful way within a portfolio, you could consider it to be, jumping, the partition to be sort of in the space of a liquid alternative. So I would kind of synonymous with hedge fund like structures or liquid alternatives, things that are using both long and short investment styles. Would definitely be in that category. And then to further break down the space, personally, I use three buckets in my explanation, okay? I use equity enhancers, I use Diversifier, and I use characteristic enhancers.

And while the world might not perfectly fit into those three buckets, it's a pretty good, simple starting point. To, to kind of just separate and divide what is a very busy space with a lot of solutions, doing very different things. I touched on the ability to use long and short positions. I would say the use of derivatives, other synthetic exposures, think option options, puts calls are some of the ways, which these solutions gain exposures that might not traditionally be available, through a conventional long only solution.

Étienne Joncas-Bouchard [00:08:54] Okay. I think that's that's a good broad explanation, to be honest. And I think, just just mentioning some of the tools available or, you know, like you mentioned, derivatives options, those are things that are not typically found in a long only active mutual fund or long only active ETF. Also, how would you categorize the like? You know, you have those three buckets. But when you say equity enhancers, what what do you mean by equity enhancers and characteristic enhancers or diversifier is like basically maybe one minute overview of those buckets if possible, just kind of broadly speaking. Yeah. What falls into each.

Brendan Sims [00:09:27] So so I would say now now we're looking to get in the weeds but happy to do so. So when it comes to equity enhancers, I would think solutions that embody similar characteristics of that of your traditional long only mandate, but with the ability to provide a certain quote unquote, an enhanced characteristic. And that might be preserving or protecting on the downside, it might be upside participation, to kind of just do and go places that a traditional long on the equity mandate can't. One thing without diving too deep is the ability to generate cash proceeds from short positions. So when we think of our traditional long only mandate, they might be three 5%, cash invested, depending on flows at any point in time. But we wouldn't really want to see a deviate two too much from that.

That said, when it comes to looking at long short equity mandates, it wouldn't be uncommon to see a cash position like ten, 15 or 20%. And that's just through the mechanism that is short selling. So I think that that's a really unique characteristic and a good thing, that these pgms have the ability to kind of pull on a lever that is short. Proceeds can create cash in short periods of time. We haven't seen too many of them in a while. But just think, when there are short term, volatile periods of market drawdowns, the ability to have cash readily available, to kind of allocate to longer term allocations can definitely come in handy. Interesting. So maybe to jump across to the diversifier bucket, what I would say are these are strategies where we'd seek to hold something that would have a lower correlation to the existing holdings of one's portfolio. So depending whether it's a relatively concentrated portfolio of, let's say, 3 to 5 holdings or a fully diversified stock bond, ETF as well as managed solutions, I think that finding assets with a low correlation, or the potential for a negative correlation to the rest of the portfolio, is definitely something really great that can reduce volatility and make a portfolio more resilient.

So solutions that come to mind within these space are long, short mandates running with a low net exposure, think 20, 40, 50% net exposed. That's the value of the longs, less the shorts or even that, that are sort of lower beat, market neutral or 0% net exposed type solutions. Merger, our market neutral are a just a few of the names within space that are offered as far as diverse buyers.

Étienne Joncas-Bouchard [00:11:46] That's, that's that's really interesting. And I think for diversified, as I guess I'll pick on that one a little bit because, you know, there's been this growth, like you mentioned, of the liquid alternative space over the past. They call it five, five years, let's say, a year like 2022, which was extremely challenging from a portfolio management standpoint. Right? There was there wasn't really many places to hide. Is that a year where it's. It helps the bull case for liquid alts. Or is it a year that maybe hurts the thesis a little bit because, like we said, you know, even diversifier or for some diversifies it was it was hard to get a negative or at least low correlation to traditional asset classes like bonds and equity. So basically kind of what was the impact of 2022, if you will, on the old space. And, you know, I'm kind of putting you on the spot here with that. But, you know, what are your perspectives on a year like that, which was extremely challenging from from an asset allocation perspective specifically?

Brendan Sims [00:12:41] Yeah, there's always going to be individuals or businesses that operate in one of two or more camps. That said, I would say that 22 was a net positive for alternatives, the year as a whole. If we can think back, even though we might not want to, it was it was a year where, few asset classes aside, there wasn't really a space to hide in. We saw low to mid. Yeah, we saw low to medium risk investors, with double digit, negative returns on average. If we think of headlines that were brought about, quote unquote, the death of the 6040. Yeah, that got belabored. But what I would say is, sounds cliche, but one of my top lines in discussing alternatives is it's an opportunity to introduce a third ingredient in the multi-asset portfolio. It's not a stock, it's not a bond. It might be using those as underlying building blocks, but it's something that's going to behave differently. So when you think of calendar year 22, I think it's a great call to action for and as a reminder, for those who maybe had longer term allocations that have remained unchanged to build a more resilient portfolio for today and tomorrow's ever changing and demanding market.

Étienne Joncas-Bouchard [00:13:46] Sure. No, that's I think that's a great point. And I actually that's a perfect segue into another question I was going to ask, which was regard to. How does crypto fit into this whole alts environment? And when you said the typical 6040 and the reason why I my brain went there is because in our all in one ETF portfolios here at Fidelity Investments, we do incorporate as kind of you will a third asset class for now. There's no liquid gold strategies in those ETF portfolios. But we do have a 1 to 3% allocation to cryptocurrency which we view as an added diversifier. How does that fit into the alt space? Is crypto an alternative? Is it a currency like how do you guys see it from your perspective?

Brendan Sims [00:14:29] So under a very broad bucket that is alternatives I would say absolutely. Crypto is an alternative asset. And if we're going to call it an asset class, there's often arguments like is it. Is it a functional currency commodity. Yeah. As a commodity, as a tax. Anyway some of these have been answered. Not all, but what I would say is it's certainly an alternative. As far as the broad concept goes, how it's used in portfolios, that's up to the investment objectives that individual investors are striving to achieve, of course. But to your point, we have a really great suite of ETFs that have a 1 to 3% allocation to Bitcoin. And we actually chatting about it, has received a ton of attention from our neighbor south of the border as of late.

Étienne Joncas-Bouchard [00:15:07] Yeah. Well it's it's a thing. Whereas you know, we we're always trying to think of head of you know like you to your point is what is the 6040 of the future look like. And it's maybe not the 6040 of the past. And when we say 6040 just for everybody listening and just that's, typical allocation for a balanced portfolio, which is 60% equities, 40% fixed income securities. Well, you know, maybe now there's 5 to 10% of alts, maybe there's a couple percentage of of crypto.

So it's interesting to see how that's going to develop as we go forward with these, you know, various investment strategies kind of growing in popularity, but also having more track record of, you know, implementation in these portfolios. So it's going to be interesting to see able to your point, this neighbor south of the border a little bit, I guess how could I say this caught up in all the crypto craziness because of what happened in January. Obviously, the approval by the SEC into, allowing Bitcoin ETFs. Yeah. So I mean, it's just part of the conversation all the time now. You know, I don't think it's maybe as much as it shouldn't be brought up as much as it is right now. But, you know, it's inevitable that it's kind of, bring up investment conversations. But, yeah.

Brendan Sims [00:16:20] Just maybe touch on that. It to the extent in which is being brought up in conversations around household tables, on during commutes in the workplace, I would say that when it comes to an allocation, we're talking one, two, three. Yeah. That said, it doesn't receive 1 to 3% of the attention.

Étienne Joncas-Bouchard [00:16:35] So no.

Brendan Sims [00:16:37] For those who are looking to build more meaningful positions to such an asset class, I do think there is a point in time where if we're talking about your holistic portfolio and planning, that there is a point where a very mature crypto or digital asset allocation kind of borders from an investment allocation into the world of speculation. Yeah. So I do think it's really important that we keep that position. Line position sizing in check has a a very enhanced volatility profile. And with that said, we do need to be mindful and keep it.

Étienne Joncas-Bouchard [00:17:05] And you know, that's that's a great point. That's absolutely right. And that's that's also the reasoning behind our the one of the 3% allocation is continually keeping that in check. It has ten times the volatility of equities to a certain extent. Then you're creating other problems in the portfolio. Right. Other biases that maybe were not intended initially. I want to bring the conversation a little bit towards ETFs. And I'll kind of. Yes, we're focusing on alts. Now, I want to just make sure that we're addressing how that growth is made. Is it happening in the ETF space also or is this reserved still to a fund vehicle for now? Because that's where it was initially constructed for for various reasons. One of them being transparency. Right. It's products that have also more sophisticated securities to a certain extent. Right. You said like derivatives and things like that, which may be harder to price, but how is that changing now, like our market makers, in your experience, being a bit more comfortable? How is fidelity approaching that? Maybe. And is that a place of growth for you? Do you see that as a vehicle that is going to be growing at all space?

Brendan Sims [00:18:06] Absolutely. So from our observations, we would see that about 20 to 25% of the landscape is available and has assets under management within an exchange traded vehicle or an ETF. Pretty good. So yeah, I mean, conservatively, let's say about a fifth of the landscape, is is offered to investors through that of an ETF. And I do think that ETFs are a space of growth. So with that said, when you combine the growth of alternatives and that of the ETFs, there is a bit of a compounding effect. We do see some of our counterparts that have had type solutions for many years converting to a liquid alternative offering, and then subsequently that liquid alternative offering also to an exchange traded vehicle.

So that's been sort of the life cycle over the past few years. And Fidelity's definitely there in part, I think that when it comes to seeing these these offerings of these solutions in an exchange traded vehicle, just know that this is the exact same solution as the underlying mutual fund or liquid alternative fund. But just through that an exchange traded vehicles. So we were very patient, and put a ton of attention to detail to ensure that our disclosure policies were able to be upheld, with market makers and those who have full transparency into the underlying holdings until such a time that we had full comfort over the, I guess, their internal processes, that would give sort of full discretion, over our holdings and our allocations that these PMS are working hard to uncover.

Étienne Joncas-Bouchard [00:19:28] No. That's great points. And I think that was kind of the sticking point of like the ETF, industry if you always like, you know, historically a lot of the assets were in passive, which is 70% what you get Dailydisclosure you got it, you got you got to look through any time of the day because you're replicating a benchmark that is very public and very visible. This is really going into active, but even more so to a certain sense, like it's like active plus plus, right. And also, you know, that brings me kind of to another conversation, which is, which is fees, which is in ETF space. These are always kind of brought up right where it's like, here at fidelity, we're, we're we're in a space where we're, we're offering ETFs that are not cheapest by any means, but we're creating solutions that we're very, you know, proud of and comfortable with from not only a diversification standpoint, but, you know, what we're trying to achieve from a performance perspective.

Also on the alt side is like if you go back like way back alley hedge funds strategies and things like that, like you had things like performance fees, you know, you know, shorting also brings up costs. You know, buying, buying, derivatives, you know, you have premiums to pay. Is there also a pressure on fees in the alt space like there is and has been, if you will, on the traditional long, only fun side, but also on the ETF side where it seems like it's kind of a race to the bottom. Is it growing enough now that, I guess your perspectives on kind of that whole dynamic, which.

Brendan Sims [00:20:53] Yeah, I would say that the pressure on fees across the industry and landscape, it doesn't spare any victim. So alternatives are not unique. With respect to evading, pressure towards fees. So investors are very cognizant or aware of sort of the changing landscape where fees were 5 or 10 years ago and where the expectation is moving forward. That said, alternatives have their costs, as you've mentioned. But I would say that when it comes to pricing alternatives, it's really important to do your due diligence across the landscape. Performance fees are a concept which you might be familiar with seeing within the alt space. And they can come in various different forms.

And how they're administered varies from fund to fund. So I'd encourage everyone to go out, read the fund prospectus and sort of see what exactly those fees are and how they're administered. And they're definitely common, I don't know, a stat for those alternative solutions out there as far as how many are currently using performance fees, the one thing I'd add is that on our on our solutions currently available across the four offerings we have, we don't currently exercise a performance fee in any capacity. And I think that these are very competitively priced in the in the mid range. Respect to the broader universe.

Étienne Joncas-Bouchard [00:21:58] Yeah. No, it's great points. I think the whole performance fee thing is just it creates complexity sometimes. Right. And I think from an investor standpoint it's also a you know, one of the advantages of potentially working with an advisor, that's why they're there. That's why they can, you know, go through those prospectuses and, and do kind of a the heavy lifting for you if you're looking for, for that type of strategy, maybe in your portfolio, if you're an advisor. Well, yeah. Well that, you know, that's some work that it's got to be done. But, you know, firms can help you with that. Obviously firms like fidelity and other. So that's a great point. I want to look forward a little bit. We talk, you know, a lot about kind of where how we got to where we are today. What are some of the trends you're seeing that you think will accelerate, if you will, into 2024 and maybe areas of growth? Or it could be new things that are coming up, like what are, investors and advisors more and more interested about in what you see right now, you know, for 2024, if you. Oh.

Brendan Sims [00:22:52] Yeah. So, I mean, just an extension of what's already been going on. So I think that in response to the change that was as little as three, three and a half years ago, we're seeing a ton of new solutions being brought onto the marketplace that is absolutely going to continue the shape and flavor which those are brought forth. That's going to be based on market demand. So, I would.

Étienne Joncas-Bouchard [00:23:09] Say market conditions.

Brendan Sims [00:23:10] Also market conditions. It would drive market demand for what people are seeking. Right. So I think that solutions that are built for the marketplace of tomorrow and that do well to complement. I know I'm being very general with this answer, but do well to complement existing holdings, and are something that someone can get behind in a lot of my meetings, people talk about investing in things that they can understand. And I think that when it comes to to building and implementing a solution for investors, it's really important.

Aside from the capabilities it can bring forth, is that they can get behind and understand what's under the hood and what are these solutions doing. So I think that's where the educational component comes in for both, ourselves internally, advisory community as well as the investor community to just stay up to speed, stay educated, and have a thorough understanding of what these solutions bring forward. So I think that to answer the question more succinctly, things in the world of options, long short strategies utilizing, shorting within the fixed income space, are all sort of really exciting things. You touched on something earlier, actually, and I, I realize I left you unanswered was, retail compared to competitors. So, in the more institutional landscape.

Étienne Joncas-Bouchard [00:24:23] Okay. Yeah, yeah.

Brendan Sims [00:24:24] The institutional landscape would have on average and I. Creation of, let's say, 2030 or even 40, 50% something that's not our stock or a bond. Oh, that is an alternative. We haven't necessarily touched on privates too much thus far. So I think that growth in the world of privates think private credit. Yeah, equity, real estate infrastructure and commodity pools, to name a few. That's that's a trend that I see accelerating into the future. I think that the industry, the landscape and the infrastructure that allows investors and their capital in the retail space to access these solutions, that's what's going to change going forward. These are vehicles that were traditionally only available to those with large coffers of capital in very liquid fashion. Yeah. And I think that going forward, we're going to see the, the piping or the industry infrastructure changing to allow retail to access these asset classes.

Étienne Joncas-Bouchard [00:25:16] Interesting. No, I think those those are all great points. So basically retail catching up a little bit to institutional potentially from an allocation perspective, growth in the private space, obviously the more demand there is, the more maybe it's simple for an asset manager to incorporate a bit more liquidity in the process. All that said, I think those are all great points. And I guess the last thing I'll bring up before we wrap this up and this has been great. Brennan. And I'm we're going to have you back on, and we're going to have updates as we go forward on kind of how this is evolving, over time. But, you know, just a little bit of a highlight on what we do here at fidelity and kind of you mentioned we have four solutions available. I don't want to, you know, deep dive into each each every single one of them. But if you know, if you had to, you know, give our, you know, our not our mission statement, but kind of what is the, the value add that we have here at fidelity for the old space that maybe is a bit different from, you know, our competitors.

Brendan Sims [00:26:09] Yeah. Of course. So I think it brings it back to the adage that we're all very familiar with. And that's the strength of our breadth and depth of research here at fidelity. We're one of the largest active shops within the equity space, as well as that of fixed income. We have a global scope, analysts and boots on the ground, across many countries worldwide, but within our respective Canadian operation here, I think it comes down to, access and relationships. I think that when it comes to choosing an investment partner, I think that relationships are very, very important and service is very important. And that's no different in the alternative space. I think that having a level of support is, is paramount in what is an increasingly complex space. And I think that the strength of our research team could not be understated when it comes to investing in alternatives. Investing long and short provides a new, differentiated source of alpha that's on the short side of the trade, in addition to the always known long side. And I think that the ability to be right through and through, across both our long and short holdings, on average, as far as our research capabilities, I think that that's something that we could definitely hang our hat on is our long term batting average with respect to analyst research, ratings and identifying great companies to invest in.

Étienne Joncas-Bouchard [00:27:25] It's an amazing answer, Brendan I like it. So we've you know, like you said, fidelity has done quite well with our longs in the past, 50 or so years. I'm sure we're as good on the, on the other side as well and might as well capture that. This has been this has been awesome. Thank you so much for for doing this. Once again to, to, you know, and, you know, everybody listening in. If you want to learn more about the alternative strategies available at fidelity, you can go on our website. They're available on funds and ETFs. Brendan, thanks again. Thank you, everybody, for joining us. Have a great rest of your day.

Brendan Sims [00:27:55] Thanks. Thanks for coming on, Adam. Take care.

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frequently and past performance may not be repeated. Fees, expenses and commissions are all associated with fund investments.