FidelityConnects: ETF industry trends and insights and helpful ETF trading practices to enhance your clients’ portfolios

[00:03:10] Glen Davidson: Hello, and welcome to Fidelity Connects. I'm Glen Davidson. Today we're spotlighting ETFs, why they matter, how they've evolved and what makes them a smart choice for investors seeking flexibility and diversification. Joining me today are two key voices from our investment team, Audrey Kim, senior investment analyst, and Francois Jack, ETF investment analyst, both supporting the product development side. Together they'll break down ETF basics, share insights on Fidelity's expanding footprint in the ETF space and explore how digital asset ETFs like Bitcoin and Ether are shaping the landscape. We'll also look at trading best practices and how our investment team partners with advisors to navigate what's next. Our goal today is to provide you with practical information about ETFs and Fidelity. As always, feel free to submit your questions through the Q&A box, and just a reminder, today's show has live French audio interpretation. Audrey, Francois, great to have you here in the studio.

[00:04:03] Francois Jack: Amazing to be here.

[00:04:04] Audrey Kim: Thanks for having us, Glen.

[00:04:07] Glen Davidson: Francois, why don't we start with you. Could you tell the audience, please, what do you do?

[00:04:11] Francois Jack: Well, I've been at Fidelity for about a year now, year and a half. I'm working on the product development team and really that's just a bunch of research, looking at industry trends, what's going out there in the market, and how can we help position Fidelity to capture some of that market share. Otherwise, I do have some skill in doing some automation tasks and so I help increase work efficiencies.

[00:04:35] Glen Davidson: Wow, we should talk more about that on another webcast. Audrey, tell us what you do on a daily basis.

[00:04:39] Audrey Kim: My journey at Fidelity started back in 2018. Right now I am the ETF Capital Markets investment analyst here at Fidelty. That's just a fancy way of saying my role is to be the link between all the participants in the ETF ecosystem. What does that look like? If you can imagine a spider web, an ETF Capital Market specialist or analyst would be in the centre of that spider web and our role is the web out to all the participant or stakeholders to make an ETF business run smoothly. For example, I would web out to market makers, traders, exchange partners, internal and external clients, so advisors, the sales team, legal compliance, marketing, and my role is to take all these different stakeholders, all these partnerships, centralize it and make sure that our business runs efficiently and as smoothly as possible.

[00:05:29] Glen Davidson: Another task that you both have is doing webcasts. It's wonderful to have you here today. Francois, let me start with you. I was just reading recently that the Canadian industry for ETFs in July brought in about $10 billion and there were 13 new creations of ETFs. That's the industry. Take us back over time, what's going on in the industry in Canada?

[00:05:46] Francois Jack: If we look at that $10 billion, what we really see is about 5.8 into equities, about 2.1 into fixed income and the rest goes into multi-asset, digital asset, those different types of ETFs. It's been a really tremendous growth you've seen in the Canadian sphere. Assets are now over $600 billion total and the Canadian market continues to innovate new products that give investors some ability to access segments of the market.

[00:06:14] Glen Davidson: That's not at the expense of mutual funds, is it?

[00:06:17] Francois Jack: We have seen a bit of a reduction in the flows to mutual funds but by no means does that mean that mutual funds are dead. I think it just depends on investor preference or how they want to access different strategies. But ETFs are, no doubt, a game changer.

[00:06:33] Glen Davidson: I think you hit the nail on the head as far as investor and advisor preference because I know Fidelity, prior to having ETFs, there was that pressure from the clients out there saying, hey, we'd really like to explore this. It took a while for Fidelity to do its due diligence, if you will, as makes a lot of sense, I think. Could you take us through where Fidelity stands in all of that right now?

[00:06:56] Francois Jack: Fidelity has a great history, a lot of success in actively managed mutual funds. It started in 1946, really game changers in innovation and prioritizing research, giving their analysts power and the resources in order to bring really great investment strategies to our clients. Over time, obviously, the industry has developed, has innovated as well, and then we saw ETFs start to appear in around the 1990s, TSE 35 participation units, something like that. It's developed since then. We've had a multitude of strategies, physical ETFs, those are like your stock, bonds, commodities, you had synthetic ETFs sort of like futures, derivative based, all these different strategies emerging allowing investors to access segments of the markets that they normally wouldn't get a chance to.

[00:07:42] Fidelity, we launched our first ETF in 2018, the Factor Dividend Suite. Back then we were only about .1% of the market share, very small. Fast forward to 2023 we're talking $4.4 billion in assets. That sounds great, right? No, not yet. We strive for better at Fidelity. As of July we were talking $18.6 billion in assets under management, more than 50 ETFs on the shelf. As of yesterday, I think the number is just inching closer to 90.5. Tremendous growth, a lot of success and it's backed by the strength and power of Fidelity.

[00:08:19] Glen Davidson: That's pretty impressive. As I was saying, Fidelity was doing some due diligence, trying to figure out if ETFs made sense but the growth since that inception, really, has been extremely fast, and very diverse as well as the solutions that are offered.

[00:08:31] Francois Jack: Correct. That's sort of the innovation in the market. We started with equity, then we moved over to fixed income strategies. One of our strongest ETF offerings are the multi-asset strategies, not just packaging securities of a single asset class into a vehicle but multiple asset classes into vehicles. Investors have really demanded that, you see the want but the appreciation for having that sort of strategy on market.

[00:08:59] Glen Davidson: Audrey, it seems that investors felt that ETFs were just passive vehicles, and perhaps they were at one point quite dominant that way. They've moved to active, they've moved to very specific areas of the marketplace. There's some very complicated ones as well, in particular in the United States. Why are ETFs important for investors and advisors to look at?

[00:09:16] Audrey Kim: You know what, I think it's just flexibility. It's optionality. ETFs were just another investment vehicle, another option out there. I think the flexibility and the ability to trade throughout the day is definitely a key and unique feature of ETFs in comparison to mutual funds. Oftentimes, ETFs can be more cost efficient. The ability to have a lower minimum investment, certain mutual funds can have certain minimum investments whereas with an ETF, generally speaking, the minimum investment is just one share. If an ETF costs $10, $50, your minimum investment is just that. I think it's the level of flexibility and optionality ETFs bring that has really resonated, not only in the U.S. but we're really seeing that in the Canadian landscape.

[00:10:04] Glen Davidson: Go ahead, Francois.

[00:10:05] Francois Jack: I just wanted to add to that. I think one important aspect of that that we should mention is the level of transparency ETFs offer as well. Mutual funds are a bit less transparent on the holding side. ETFs, a lot of them have daily holdings released that they have to disclose. I think investors appreciate that level of transparency and it gives them a bit more confidence in what they're investing in.

[00:10:26] Glen Davidson: Thank you. Audrey, can you comment, there is liquidity, you could buy an ETF in the morning and sell it in the afternoon on the same day.

[00:10:33] Audrey Kim: That's right.

[00:10:34] Glen Davidson: I think that gives people comfort as investors. But is that actively done, do you think? Same day, I mean.

[00:10:42] Audrey Kim: Yes, definitely there's the people that choose to intraday trade but I find that, at least with our client base, they're still used as long term hold strategies. Again, I think it's just going back to what makes ETFs so great, it's that optionality. If you want to act on a news that happened in the morning and sell that position out towards the end of the day, you can. You don't have that same level of flexibility when it comes to mutual funds.

[00:11:09] Glen Davidson: Earlier you mentioned trading ideas and structure. If I want to get into an ETF should I say as soon as the market opens, I'm in.

[00:11:18] Audrey Kim: You know what? I always say there's a sweet spot when it comes to trading ETFs. What is that sweet spot? I would say it's 15 minutes after the markets open and 15 minutes before the markets close. Why is that? I'll start off with the first 15 minutes after market open. Within those first 15 minutes it's really meant for price discovery. What I mean by that is that's the time the markets are trying to figure out what the fair price is and ETFs are trying to price out the underlying securities. It's an extremely volatile time, prices are volatile, and that time is meant for price discovery. We always recommend to our clients, wait until 9:45 at least to start trading our ETFs. Now, 15 minutes before close, so that 3:45 to 4:00 p.m. mark, that's when liquidity starts to dry up. That mid-day point from 9:45 to 3:45 is when you're going to see prices be the most stable and probably the best time to trade ETFs, irrespective OF what ETF they are.

[00:12:19] That being said, if you choose to trade the open or if you chose to trade the close for whatever reason, it's important to leverage limit orders. I can get into limit orders a bit more later on. The way I like to look at it is, trading the open and closed is similar to, let's say, taking a subway in the peak of rush hour. You could do it. You probably will get to where you need to get to but the thing is you might run into some unexpected situations, it might be a little bit more unpredictable. I always say, in order to protect against slippage use limit orders because that will help ensure that you're not transacting at unexpected prices. Another point that I want to make here is creation and redemption cutoff times. Different ETF issuers and different ETFs will have different creation redemption cutoff times. These times are important because this is the time where market makers are no longer able to submit creation orders or redemption orders with the ETF issuer.

[00:13:24] Glen Davidson: Could I interject? Could you define creation, please?

[00:13:27] Audrey Kim: Yes, a creation is when a market maker goes to the ETF issuer, like Fidelity, and asks for more units of a given Fidelity ETF in exchange for the underlying basket of securities. Then Fidelity will then, as the ETF issuer, deliver shares of an ETF, let's say FBAL, FBAL, for example, to the market maker and the market maker is then using that creation mechanism, or redemption mechanism, to inject liquidity.

[00:13:53] Glen Davidson: Creation because of demand.

[00:13:55] Audrey Kim: Exactly. Those cutoff times, kind of going back to the cutoff time, they're very important because once that cutoff time passes market makers can no longer create or redeem shares of an ETF. If you have a large block trade or an outsized order that you're trying to trade that day you just want to double check either with the ETF issuer or the capital markets desk or your trading desk and just check that, hey, am I still within that creation-redemption cutoff time. That helps ensure that the spreads that you cross are tighter.

[00:14:30] Glen Davidson: That makes sense. Francois, are there specific requirements for an investor or advisor to buy ETFs?

[00:14:36] Francois Jack: That's actually a question that's best posed to Audrey, she deals with that a lot more.

[00:14:42] Glen Davidson: Licencing types of accounts just to be able to buy into ETFs.

[00:14:49] Audrey Kim: IIROC licence but the way Fidelity has positioned our ETF business is we want to make sure that we have a product for everyone. For example, we have many ETFs out there, I'll use All-in-Ones as an example, and our factor ETFs, that have an ETF mutual fund version. If your book of business best works with funds we have an ETF wrapper solution for you. If you prefer working with direct ETFs we have a list of 52 ETFs that you can work with. It just really depends for you and we likely have a solution that works best for your book.

[00:15:29] Glen Davidson: Very interesting. 52 ETFs and in that are crypto assets. Talk about that, Francois.

[00:15:36] Francois Jack: Digital assets have been on the rise recently. It's a lot of talk. I think we tend to forget Bitcoin, one of the major digital asset ETF. Bitcoin itself is only 16 years old. It's still quite amazing technology but there's a lot of developments in the space, a lot of innovation happening, a lot of  regulatory changes which has been probably the most significant catalyst for the space since the tail end of last year with the new administration in the White House. They've been more accommodative to digital assets and finding ways of really integrating them into our everyday. If I think about the Genius Act, which has recently passed, that has definitely been a catalyst for Ethereum and for some other digital assets as we've seen recently.

[00:16:23] One of the best things about Fidelity is our FBTC and the fact that we've incorporated that at that ETF into our All-in-One products. I think that's really something that differentiates us. We're giving our investors a chance, in those products the chance not to just see what's going on in the market but participate in digital asset space as well. So it's no longer just for the institutions or the corporations, we're bringing it to everyday investors as well.

[00:16:48] Glen Davidson: So there are ETFs that are built, you could buy them on their own but they're also considered building blocks for these more diversified solutions as well, that are also ETFs.

[00:16:56] Francois Jack: Yes. That goes back to the whole realm of these multi-assets that are packaging not a single asset class but multiple asset classes together, diversifying those risk exposures and also helping with the return process along the way.

[00:17:11] Glen Davidson: We just had a question come in just following up on Bitcoin, how does the ETF process work and track the price?

[00:17:19] Francois Jack: We have a dedicated supplier. A lot of it is trading specific but we have a dedicated supplier, I believe that's how it works, who we get our Bitcoin from. If you could talk more about the trading aspect about it, that's more Audrey's field.

[00:17:36] Glen Davidson: I'm glad you're both here.

[00:17:38] Audrey Kim: We have a reference price, a Fidelity Bitcoin reference price that we target and that's how our advantage Bitcoin and also our advantage Ether Bitcoin aims to track the Bitcoin price index.

[00:17:50] Glen Davidson: Okay, good. We've also had a question come in just defining more active versus passive and how they track the benchmark.

[00:17:58] Francois Jack: Passive, you're tracking a benchmark. If we think about TSX 60 or TSX Composite...

[00:18:03] Glen Davidson: It's like a one for one, isn't it?

[00:18:05] Francois Jack: Yes. Passive, it's actually difficult to do. Prior to that you'd have to buy every single stock, own it individually, that's expensive, but then you also have to rebalance it as the market changes. Markets are dynamic, they're not staying the same every day. Passive investing, with ETFs it really just tracks that index and does it so efficiently and in a low cost manner so you have broad market exposure. The active story, which is one I'm most excited about, you've really seen a rise in active strategies. They're diversifiers but they also allow investors a chance to potentially enhance their return above that passive benchmark. Maybe it's a bit more stock picking, it's more segmented, it's more focused on certain qualities, factors, different styles of investing. Active, really, that whole debate, I have seen a lot of growth in the active sphere recently.

[00:18:58] One of the best examples, I think, year-to-date is the global strategies, global equity strategies, $2.8 billion in July relative to $1 billion in the U.S. If you think of your homebuyers, you kind of know what's going on more closer to you but when you think about investing internationally it's harder to get the ideas, it's harder to know what companies are doing. The reliance on active managers who have those resources, who have the reach and the capabilities to go and investigate these companies and really pick the best solutions for a portfolio, that's where active really comes in. That's where the strength of active managers come in. Fidelity has been a pioneer of that. Our global reach allows us to really extend to all regions of the globe and know what's going on in markets outside of our domestic North American market.

[00:19:47] Glen Davidson: Very interesting. Because you said mutual funds are not dead, which is a good thing, can you talk high level? Are there any taxation differences between an ETF and a mutual fund?

[00:19:56] Francois Jack: What I will say, I can't answer specifically but the only thing I would say is that generally there are some tax benefits to ETFs, and that's where I'll end it.

[00:20:04] Glen Davidson: And an investor can dig into that with their financial advisor, their tax professional.

[00:20:07] Francois Jack: Exactly, their tax specialist.

[00:20:09] Glen Davidson: Interesting to look into. Audrey, you mentioned earlier market makers.  What's that all about?

[00:20:14] Audrey Kim: They are the absolute heroes behind the scenes to make sure that ETFs always have access to liquidity. What is their role?

[00:20:23] Glen Davidson: Where do they work, first of all?

[00:20:25] Audrey Kim: They work all over the place, Glen.

[00:20:26] Glen Davidson: Part of banks?

[00:20:28] Audrey Kim: Yes. Majority of the market makers in the Canadian landscapes are part of the banks. That being said, not all are. What's their role look like? Their role is to take the other side of that creation and redemption mechanism which helps ETFs be a little bit more tax-efficient. What they do is they're the ones that can help supply liquidity in the event there's a large trade. Actually, one of the questions that we often get is is, hey, I noticed that this ETF, the average daily volume is relatively low compared to this ETF. Is there any reason for concerns?

[00:21:06] Generally, what I say my answer is, no, there isn't reason for concern because we have market makers and dealer agreements with almost all the market makers in Canada. They're able to create or redeem shares of that ETF. Irrespective of the volume there's always going to be liquidity. What I would say there is the liquidity of an ETF is really driven by the underlying securities. As long as the underlying securities, that basket of that ETF, is liquid the ETF would inherently be liquid. Given the creation redemption mechanisms there will always be a market maker. There is a lead market maker for each one of our ETFs that's ready to take on the other side of the trade.

[00:21:49] Glen Davidson: That must be an expanding business as well with the increase in ETFs in the Canadian market--

[00:21:54] Audrey Kim: For sure.

[00:21:56] Glen Davidson: --business, just as your development as a team. Can you comment on that?

[00:22:00] Audrey Kim: Yes. Just the other day I saw a few of our market making partners. I've asked them how's life been going recently and they think, we've been keeping busy, lots of new ETF launches. That's just more and more mandates that they're having oversight of. That being said, they have a lot of technological advancements in their business so they're able to still remain efficient and have eyes on a lot of these ETFs. What I would say about Fidelity is Fidelity has a really great relationship with our market making partners. That's one that I'm extremely proud of. I feel confident knowing that if there's an ETF, one of our ETFs that have lower volumes than let's say another one of ETFs, we have a designated lead market maker there that is contractually obligated to service and provide liquidity for that ETF.

[00:22:47] An analogy that I always like to bring up is think of a grocery store and think about the inventory that's on the shelf. That's actually not all the inventory for that product in that grocery store. There's a storage room, a back room with a lot more inventory. If they need more beyond what's in their storage room the grocery store can call up the issuer, ETF issuer, Fidelity in this case, and just ask for more, again, through that creation process or redemption process. What you see on screen isn't actually the full liquidity of a given ETF. There's always layers of hidden liquidity.

[00:23:21] Glen Davidson: That's very interesting, thank you. Francois, earlier you mentioned about bringing efficiency to the team. Is some of that efficiency tied into how the team works with market makers and helping advisors and investors?

[00:23:30] Francois Jack: Not specifically with market makers but how we do research, how we understand what's going on in the market, really automating some of our workflow so that we can make decisions a bit faster.

[00:23:40] Glen Davidson: Are you AI?

[00:23:43] Francois Jack: I'm Chat GPT secretly. Really, it's based on the work that they have done, by the way. It's a lot of work that they have done before, previously to when I joined, I've just taken that and enhanced the workflow in a way that makes it a bit more faster for us to see what's going on, understand, be able to have more quality discussions and have this discussion here today, for example. I think that has been a strength, it's not a strength for myself but in terms of Fidelity's idea of how they invest in employees, how they invest in technology and what they believe the industry is heading to in the future, and our innovating solutions that make it more efficient for ourselves but also for our clients.

[00:24:27] Glen Davidson: Thank you. I think when ETFs started to become even bigger in Canada there were investors who were concerned that if there's that liquidity or perceived liquidity of I can buy and sell in the same day, that may be a strain on the portfolio manager but it's really not because this is between buyers and sellers in the open market. It's not like a mutual fund that needs cash generation should there be a redemption that's happening. Can you talk more about that, Audrey?

[00:24:51] Audrey Kim: Correct. There's two ways in which a creation or redemption can happen, in kind or in cash. Again, there's two layers of liquidity as well, secondary market and the primary market. That secondary market transactions is exactly what you just spoke about there. It alleviates kind of the strain on the portfolio manager and hence why ETFs are perceived to be more tax efficient than other investment vehicles.

[00:25:14] Glen Davidson: Makes sense. Francois, you're on the product development side. You can't tell the audience what we're going to do next but you could talk about trends and you could talk about the strengths that Fidelity has that could contribute to that. Recently, I was reading about single stock ETFs in the United States, and I'm not suggesting that Fidelity is going there, but it's interesting to see from passive to active to very specific parts of the market now to single stock, leverage, inverse leverage, it's getting quite complex. What do you see as far as the future for the ETF business?

[00:25:49] Francois Jack: I look back at what we've done from 2018, factor ETFs, we moved into some more active strategies. Recently, last year, we launched a derivative-based product, so FEPI, the covered call ETF, and then we continued to launch multi-asset strategies. We have the digital asset space covered and continue to explore things there. While I won't go into the details or give away any secrets what I will say is that given our strengths and our capabilities I can only expect great things to continue coming to market from Fidelity.

[00:26:25] Glen Davidson: FEPI, let's talk about that briefly. Fidelity Equity Premium Yield. I met the portfolio manager, his name has just slipped my mind.

[00:26:32] Francois Jack: Eric Granat.

[00:26:33] Glen Davidson: Thank you. He's in the United States and it opens the door to the fact that here you are, Fidelity Canada, but you have the U.S., you have global Fidelity business behind you as far as supplying solutions for the ETF suite. Please talk about that.

[00:26:46] Francois Jack: This is our edge, our ability to have not just Canadian perspectives but U.S. and global perspectives. We're able to share ideas and that translates into value for our clients in terms of the strategies that we are going to be able to bring to market. We just came back from a trip from Boston, met with the mothership, and it was an eye-opening experience not just from an asset management lens but thinking of Fidelity as there are than 400 patents that we have. It ranges not just in the asset management space but also payment systems, cybersecurity. There's a lot going on and a lot of knowledge sharing, a ton of intellectual capital and that's one of the edges I think that really makes Fidelity's products such high quality.

[00:27:34] Glen Davidson: You said that you've been at Fidelity for a year and a half. You said a year but really it's a year-and-a-half. What's something that's really mattered to you when you now look at your trip to Boston, all that you've experienced in a relatively short period of time.

[00:27:48] Francois Jack: Opportunity but also I think one of the great things about Fidelity is really appreciating what their employees do for them and showing that back in terms of great work-life balance, great perks, generally, of the job. That trip to Boston, for example, it was an amazing experience. It's eye-opening. You learn more and you come back inspired to do more for them. It's a give and take and it's a cycle that just reinforces and makes the company just great.

[00:28:17] Glen Davidson: Thank you. Audrey, you've said you've been at the firm since 2018.

[00:28:20] Audrey Kim: I think so, yes. I know so.

[00:28:24] Glen Davidson: What have you learned over that time that's now given you the ability to be a useful resource, you and your team, for investors and advisors?

[00:28:33] Audrey Kim: We absolutely do everything to prioritize our client experience. If you were to ask me, what is the ETF Capital Markets team's number one priority, it's absolutely client satisfaction and client experience. Second, the resources we have at Fidelity is just unbelievable. Francois and I just had the opportunity to go visit Boston and see all the wonderful and amazing things that Fidelity does from a global perspective, the resources we have at hand to ensure we are staying with the fast moving industry and the resources we have to maintain very strong relationships with our business partners so that our clients can have a good trading experience with Fidelity ETFs is just outstanding.

[00:29:27] Glen Davidson: Thank you for that. You've both talked very glowingly about this recent trip to Boston, all that you've learned from them. With the success that you both talked about of the Canadian marketplace, of Fidelity within the Canadian marketplace, they've probably learned a tremendous amount from you as well.

[00:29:41] Francois Jack: I would say the discussions we've had, it wasn't just one question and one answer. It was a two-way discussion and they're learning from us, we're learning from them, sharing our insights. Again, that knowledge share is definitely great.

[00:29:54] Glen Davidson: Well, on behalf of our audience we've learned a lot from both of you today. So Francois and Audrey, thank you so much for being here in the studio today.

[00:30:01] Audrey Kim: Thank you.

[00:30:01] Francois Jack: Thank you for having us.

[00:30:03] Glen Davidson: And thank you for joining us. Coming up on Fidelity Connects tomorrow, Equity Research Associate Connor McGrath explores the latest developments shaping Canada's insurance and real estate sectors. From evolving consumer needs and digital innovation in insurance Connor breaks down where the risks and the opportunities may lie in the months ahead.

[00:30:20] On Monday, Fidelity's Director of Global Macro, Jurrien Timmer, will be back to set you up for a trading week ahead and help you better understand what's moving the markets around the world with his signature charts and data.

[00:30:30] On Tuesday, Ilan Kolet, institutional portfolio manager, will share the latest insights from Fidelity's Global Asset Allocation team, where the team is positioning portfolios for the second half of 2025 and how they're navigating market dynamics across asset classes. Tuesday's webcast will be presented in English with live French interpretation. Thanks for joining us. I'm Glen Davidson. Take care.