FidelityConnects: The ETF roundup with Étienne Joncas-Bouchard

Join Étienne Joncas-Bouchard, Fidelity’s Director of ETF and Alternatives Strategy, for a discussion of the current ETF landscape, including an update on Fidelity All-in-One ETFs and our ETF product lineup.

Transcript

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Hello, and welcome to Fidelity Connects.

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I'm Pamela Ritchie. The momentum in Canadian ETFs

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continues into the 11th month of the year.

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Despite Canada not being the most popular destination for

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global investors the TSX has delivered standout

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performance driven by sector heavy markets

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filled with materials, of course, precious metals, leading

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this charge. Beyond Canada an interesting trend

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is emerging in the U.S.

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The rise of the so-called anti-factor theme

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where companies that traditionally shouldn't really be

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outperforming are, in fact, and leading the way.

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What does this mean for investors?

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How long could these trends last?

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Where does this leave those seeking diversification?

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Joining us here today to unpack it all in this month's

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edition of the ETF roundup is Fidelity Director of ETFs

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and Alternative Strategy, Étienne Joncas-Bouchard.

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You're right here from Montreal.

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Thank you for joining us.

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We're in person. We made it through the blizzard that was

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yesterday going on to Montreal and we're very happy to be

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here.

I mean, did you pull on the old boots, like it was actually

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a proper...

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Yeah, we did. It was two hour delays at the airport.

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We got out but we had about a foot and a half of snow so I

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was happy to see that you guys, it all melted here.

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Yeah, just in time for you to land.

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Well, we're delighted that you're here.

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Thank you so much.

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I wonder, so really the news of the roundup of this

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month is that there's no fear.

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It seems like investors continue to have a strong risk

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appetite and just generally speaking

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from a flows perspective the story that

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we've mentioned a few times I think throughout this year

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is really equities leading the way relative to fixed

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income.

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Diversification happening, though, there was a lot of

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demand for international equities over this year so

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far. Actually, we can pull up slide 1 and show our

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audience some of the key themes that we're mentioning here.

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Obviously, the number one headline is just overall

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the Canadian ETF industry is in, by far, its

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best year ever.

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The headline is that bottom line.

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Yeah, let's call it $95 billion in net new

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assets.

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With the first week and a half of November we're actually

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above $100 billion.

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Oh, can you tell us that?

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November numbers?

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It's not a top secret. It's out there.

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It's been truly incredible, Fidelity, and

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thank you to everybody on the line who supported our

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lineup. Obviously, it has been a record year for us.

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We're capturing about 10% of the total flows of the

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industry right now.

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Congrats, that's huge.

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Yeah, thank you. Really, the main part where we've

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shined, if you will, is in the multi-asset category with

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our All-in-One ETFs, which I'm sure we'll have a chance to

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talk about a little bit later today.

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To your point with regards to risk-taking, we're seeing it

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kind of in every different category.

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On the alt side, for example, or inverse levered,

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or even any alternative-themed stuff

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we're seeing more and more demand for levered products

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instead of just long/short, market-neutral, which is kind

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of more of the traditional side.

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Fixed income, you're seeing outflows from cash and short

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term bonds into corporates, into longer duration products.

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More risk.

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So more risk, more risk on both those.

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On the multi-asset side there's more and more demand for

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growth and equity mandates instead of just balance, like a

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6/40.

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On the equity side you're seeing a lot of demand for either

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pure beta or you're seeing demand for things that are more

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growth-tilted. You're seeing a lot of demand come back for

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U.S. equities in Canada even over the last couple of

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months, albeit internationals really led the way

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year-to-date, I will say.

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We are seeing that just slow down a bit because that's been

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a huge trend for 2025 up until maybe

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October-ish.

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Yeah, so pretty much at the

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end of Q3, since the beginning of the fall,

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we started to see a bit more demand on U.S.

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I mean, there was demand for U.

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S. Equity ETFs, it was just about every

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dollar that would go in there were two going to

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international mandates. It's pretty much back to

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one-to-one, and we actually saw it for October.

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Even Canada also seeing a lot more demand which

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is kind of, I guess,

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it's interesting even the fact that the Canadian index has

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worked all year, it took a long time for flows to come

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back. I think that was a little bit of kind of the fear

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of missing out, if you will, on the U.S.

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rally that we've seen since April but as

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well as just the diversification demand for outside North

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America which was happening.

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So we caught some of that, Canada caught some of that.

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Yeah, absolutely, absolutely.

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From a performance perspective for international markets,

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if I use the MSCI EAFE index it's the best performance

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year-to-date that we've seen so far since 2013, so more

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than 10 years.

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On the Canadian side it's one of the good years we've had.

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On the U.S. side it's a pretty solid year as well.

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So all around it has been a really strong market, not

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what we expected back in March.

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Now you've seen, obviously,

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as soon as the 90-day tariff pause happened that was paired

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with central banks starting to talk about easing,

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especially in the U.S. In Canada and international we were

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already there.

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Risk appetites, people are still hungry for risk.

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It's still here. It's interesting because you hear a lot of

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discussion and talk about fear but in fact

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those numbers show that there's actually FOMO, in

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fact.

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Absolutely, but I think inherently a

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lot of advisors and investors that we've had the chance to

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talk to this year are all kind of ...

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it's just like, pinching themselves in the sense like this

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is great but we weren't expecting it to be this good and

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we're kind of worried that it

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could flip, starting to think about defence but

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not really pulling the trigger yet on going defensive.

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But there is some worry, I think, in there, whether that's

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concentration risk in the U.S., whether that's

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geopolitical risks ongoing in the Eurozone.

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In Canada, 30% or so of

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our return came from the rally in gold.

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Is that sustainable?

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All these things I think investors and advisors are aware

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of them, we just haven't

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really seen the reaction yet.

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It's really interesting. When we're talking about just the

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interest rate story, which is something actually we don't

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talk about that anymore, that's not even the story, but if

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you were to look at the interest rate differentials, and

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you mentioned Canada, Europe, they've been cutting for a

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while but it was the Fed that was catching up.

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Because of that are there cycles linked to that?

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Usually there are. It's been kind of a strange market that

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way.

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Are we earlier cycle, for instance, because we've got going

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faster on that?

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I think the anticipation from our perspective

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is that, and I think this is fairly much a shared opinion

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from our Asset Allocation team or our team of macro

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experts, Canada

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and Europe are likely to be first to go into an early cycle

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type of recovery.

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The anticipation of that means that, obviously, market's

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forward-looking mechanism what has performed

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well has been a bit more on the cyclical value side which

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is generally more kind of the early cycle type stuff,

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whereas in the U.S. it's really the late cycle stuff that's

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working.

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I think the stimulus that's being done by the central banks

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as well as, I mean, the fiscal spending that's

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expected from both of those regions, the promises that have

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been made, would support this kind

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of overall fiscal and monetary stimulus to eventually have

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an impact on the economy and then to drive economic growth

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going forward.

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That anticipation needs to be delivered, obviously, but

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right now I think the market's basically telling us we

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should be experiencing some type of an early

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cycle/mid-cycle recovery coming soon in those

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regions.

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Even if we haven't hit the recession yet, or if we don't at

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all.

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I guess best policy is to avoid a recession.

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If you can either kind of take a step back from

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a late cycle to a mid-cycle environment or even kind of

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skip the recession part I think certain areas have

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definitely faced kind of more recessionary pressures.

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Now we're talking about outside of the U.S.

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but in the U.S. there has been a manufacturing recession

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for the better part of 2 1/2, 3 years.

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It's been the longest period where you've seen the

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manufacturing PMI below 50

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which is not indicative of a market that's up more than 15,

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20% on an annualized basis in a couple years in a

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row.

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It has not dragged down the overall story.

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No, because it's been offset by a mega trend, right?

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That shift in market, or I guess that different stages of

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the market cycle will impact factor performance which,

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obviously, is crucial to what we look at given the way

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that our All-in-One ETF portfolios are structured and just,

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basically, most of the research that we do is kind of which

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factors should work when, et cetera, so that's really

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important for us.

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You make sure that the All-in-Ones have exposure to all of

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the factors, we go through value, momentum, quality, low

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vol, because

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you have exposure to all of them in a way within the

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All-in-Ones, and we'll talk sort of more broadly about

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them, but you make sure that you catch whichever one is

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working, essentially.

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Absolutely. Actually, if we can put up slide 2 maybe, I

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should have probably pulled that up before we went on that

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little discussion on which factors and where we are

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because we've clearly there very simply identified

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[crosstalk].

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Now you've outlined it and here's the picture.

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Yeah, there we go.

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Our job is, yes, we want to try and figure out where we are

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so that we can then provide insights into this is what

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should be working but that requires that the management of

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the portfolio from the advisor side be very tactical in

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nature. If we say, for example, we like momentum right now,

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and that's actually kind of true for every region because

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it does work in the mid-cycle and late cycle,

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well, that can change very quickly.

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What we do know is that whether you pick momentum, value,

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low vol or quality over

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a long period of time we do see strategic alpha

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or a risk premia or however you want to call it.

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There is excess returns that can be generated through a

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full cycle.

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In a more diversified strategy--

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--somebody who wants to take a more core approach that's

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also why we have like our regional equity ETFs, the All

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American, All Canadian, All International, where we isolate

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one region but we combine the four factors.

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Give you a more consistent experience.

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In the U.S. momentum is the only factor outperforming

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this year. In Canada it's value and momentum, international

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is value and momentum.

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Most people would have thought, and even us considering

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at the beginning of the year, we really liked quality and

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momentum because quality generally works well in a late

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cycle type of environment.

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There's a flight to safety, higher profitability businesses

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but because of the sentiment change we saw in international

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markets, notably like industrial started working really

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well, financial started really, we need to finance all this

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defence spending that we want to add and bring our NATO

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percentage contributions up, it impacted sectors

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that are generally more early cycle. Energy even

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to a certain extent is not having a terrible year, value

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has worked there. It hasn't worked as well in the U.S.

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because it's just been entirely driven, it feels like, by

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this kind of momentum beta rally since April.

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Let's talk a little bit more about that because it is,

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obviously, the Mag Seven, and you could expand that to 10

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stocks rather than 7 and so on, but it's also what

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is sort of following those top stocks

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which has contributed to the overall momentum story that

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you're talking about here.

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That's where some of the, I don't know if you call them

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fears, but worries about a late cycle or sort

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of topple exist, it seems.

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Yes, that's absolutely

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... once again, worrying feels very scary.

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Maybe we're not there yet.

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You're an investor, you don't worry, you make decisions.

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Exactly. But it is,

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once again, cause for concern is probably not the right

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words but it's something to keep an eye on because

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any time you have ...

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for example, the Mag Seven are now 36 to 40%,

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it fluctuates almost a per cent a day depending on their

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performance, a very large chunk of the

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S&P 500 Index which is heavily invested via passive ETFs,

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it's heavily benchmarked against for active managers, so

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you always have to kind of figure out the contribution of

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these large names because inherently they're the ones that

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drive the ship now.

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Every day that we get a dollar that goes into that index

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via investment they're getting ...

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it's like a snowball effect, they get larger and larger and

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larger.

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As they continue to deliver from an earnings standpoint,

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from a profitability standpoint, now we're seeing heavy

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reinvestment of ...

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not the entirety of their free cash flow but a lot of their

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cash flow going to CapEx, for AI expansion.

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The issue is the kind of

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ripple effect, if you will, into names that have

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not displayed or have not earned the

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title of being one of these mega-cap names that is highly

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profitable, has really high return on equity,

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return on invested capital.

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Massive free cash flows that they don't need to issue debt,

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or only if they want to.

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There you go. But there are a lot of names that are issuing

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debt to fund this.

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There's a lot of companies that haven't actually generated

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any profits but are being compensated like an

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Nvidia, for example, or like a Meta or some of

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these other names.

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That's the anti-factor part is that you have these high

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vol names, so it's the opposite of low vol, you have

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an unprofitability aspect to it, so the anti-quality.

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They're expensive, anti-value, and they hadn't really

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worked up until this theme really started to play out in

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April and they're up 50%,

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100%, 300%, 500%, 600%.

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These aren't $100 million market cap companies, these are

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multi-billion dollar businesses going up very rapidly

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and kind of attaching themselves to

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the success of the very large names.

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Do we need a new factor for them or they just fit into

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momentum?

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They get captured by momentum and hence why momentum's

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working. Obviously, they need to have a certain size.

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For example, in our products we look at the Russell 1000 so

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it's a bit larger than the S&P 500 so we will sometimes

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capture some of these names. The issue is that we also look

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at risk-adjusted momentum. If you just

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spike ...

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we want more consistent names that have been ...

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so we will capture more of the larger ones, naturally,

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because of that. That being said, you

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don't want to change something that's

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worked for 30 years based off of four months performance.

[00:13:58.280]

These periods generally

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are short-lived. They happen once we've had

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drawdowns, usually it's coming off of a drawdown, this one

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being very different because it was more trade

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policy that led it.

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It wasn't an earnings recession by these names

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which generally will be kind of, I mean, we're expecting

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these companies to be less profitable, or maybe those

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growth expectations just don't materialize like we expect.

[00:14:25.040]

These periods, once again, they happen

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for three, six-month periods.

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It reminds me a lot of the early 2021 where we had that

[00:14:32.600]

meme stock rally but it's like the AI trade's also

[00:14:35.480]

transitioned into, okay, well, the crypto stuff's working,

[00:14:39.200]

the quantum computing stuff's working, but there just

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hasn't been any money made in quantum computing yet.

[00:14:44.880]

There might be but there's going to be winners and losers

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and hence why whether it's active management, whether

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it's a more diligent kind of quantitative approach where

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we screen for fundamentals that generally tends

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to play out over time to at least

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avoid a lot of the losers.

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Not to say that we're always going to pick the best ones,

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that's a wild claim to make, it's more that we are going to

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avoid maybe some of these mistakes that the market's

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mispricing.

[00:15:10.320]

In avoiding them, let's go into the All-in-Ones, and

[00:15:13.320]

we can go more broadly into ETFs, but the discussion of

[00:15:17.360]

with a market like this, which is pretty tricky, I mean,

[00:15:19.320]

there's a lot of discussion when you have

[00:15:22.440]

your All-in-Ones in various portfolios that can

[00:15:25.440]

be looked at as core to traverse through all kinds

[00:15:28.560]

of markets, go through some of the regional discussions.

[00:15:32.600]

We've mentioned a lot about international, all Canada but

[00:15:34.800]

also the U.S. being possibly at just a different point in

[00:15:37.560]

the cycle, how do you invest for that?

[00:15:40.160]

How do suggest people invest for that?

[00:15:43.080]

Actually, if we could pull up slide 3 we can kind of

[00:15:45.960]

overview the way that we look at things from a portfolio

[00:15:48.320]

construction standpoint with the All-in-One ETFs.

[00:15:50.720]

This lineup was initially launched in 2021 with

[00:15:54.040]

FBAL and FGRO, our balanced 60/40 and 85/15

[00:15:58.200]

product, 85% equity.

[00:16:01.400]

You have the tickers on screen but all of them are

[00:16:02.920]

available in funds. Just thought I'd mention that for those

[00:16:05.200]

listening in. These are available to everyone.

[00:16:07.800]

The idea was to create

[00:16:10.760]

a very core portfolio so that there is no

[00:16:14.200]

asset allocation bias relative to our peers and also just

[00:16:17.360]

to kind of broad classical benchmark, not

[00:16:20.600]

really take any geographical bias, not taking

[00:16:23.640]

any style bias so hence why we have the diversification

[00:16:26.400]

effect with the different factors.

[00:16:27.920]

We're not...

[00:16:28.240]

So you have a universe to go in terms of regionally, you

[00:16:31.280]

could go wherever but you're not taking a bias.

[00:16:33.760]

Yeah, and more from a portfolio construction

[00:16:37.160]

basis where ... for example, if we look at our

[00:16:40.280]

main competitors that had existed for a long time, our

[00:16:42.480]

objective was to say we think that this approach with

[00:16:45.000]

factors, with some active management, we can win on

[00:16:47.760]

security selection.

[00:16:50.480]

We're not going to try to beat them by having more U.S.,

we're

[00:16:52.120]

not going to try to beat them by having less Canada,

[00:16:53.720]

whatever decision that you want to make from a tactical

[00:16:56.200]

asset allocation perspective. We wanted to match them and

[00:16:59.040]

say we can pick stocks better than you can

[00:17:02.280]

rather than just buy everything with passive.

[00:17:03.760]

In that process

[00:17:07.080]

being strategically managed we're continually trying to

[00:17:09.560]

stay close to this neutral mix and to let the

[00:17:13.040]

underlying strategies work. Our

[00:17:16.080]

value ETFs, they rebalance twice a year and they change

[00:17:18.680]

with current market dynamics.

[00:17:22.920]

In our U.S.

[00:17:24.320]

Value ETF back in 2022, all of a sudden we had a very large

[00:17:27.080]

overweight to Meta, it was trading at a lower P/E than

[00:17:29.960]

Exxon Mobil at the time.

[00:17:31.720]

These things are moving underlying.

[00:17:36.520]

I'm going to mess this metaphor up but a duck on

[00:17:39.480]

a pond, we want to stay cool on the top but there's

[00:17:42.480]

a lot of stuff kind of paddling underneath the water.

[00:17:45.920]

That's really kind of the simplicity aspect of it where

[00:17:49.040]

they are going to be very correlated to broad market

[00:17:51.880]

indices but we want to win over time gradually

[00:17:55.120]

with better stock selection, which is exactly what we've

[00:17:58.280]

been able to do since launch.

[00:17:59.920]

But there are challenging periods like any product.

[00:18:02.000]

Nothing is supposed to work all the time otherwise there's

[00:18:04.200]

no need for anything else.

[00:18:05.880]

The more challenging periods is when we have melt-ups and

[00:18:08.600]

when we really have high risk-on markets because from

[00:18:11.680]

our perspective these are built for advisors, these are

[00:18:13.520]

built for Canadian investors that have

[00:18:16.960]

some risk management in mind, where

[00:18:20.480]

we don't want

[00:18:25.720]

downside capture being more than one.

[00:18:27.600]

That's for sure. We saw that in March

[00:18:30.640]

where these protected significantly better than our main

[00:18:33.400]

passive peers but then yes, we are lagging

[00:18:36.640]

when you have this kind of euphoric type risk-on market

[00:18:39.960]

a little bit since April.

[00:18:41.160]

That said, I mean, the flows speak

[00:18:44.120]

for themselves, they're coming in.

[00:18:45.680]

There's, obviously, a number of people who, I don't know if

[00:18:48.600]

concerned is the right level but they probably won't access

[00:18:51.360]

to something that is more core, that is a steady of the

[00:18:53.960]

ship to go through this because it's a fascinating, really

[00:18:56.880]

interesting but to some a wild market, for sure.

[00:18:59.200]

Absolutely. Realistically we're trying to outperform

[00:19:02.160]

on the way up as well. It's just when you have

[00:19:05.120]

these ...

[00:19:06.440]

we've already touched on it, obviously, like they're kind

[00:19:07.960]

of anti-factor. Another way to say it is like junk rallies,

[00:19:10.160]

not junk per se necessarily,

[00:19:13.520]

but when you have...

[00:19:14.240]

Well, it's unprofitable stuff.

[00:19:14.960]

Yeah, unprofitable stuff, you've got a lot of very

[00:19:17.600]

expensive names are rallying.

[00:19:19.720]

It's like, yeah, that's not going to score well for us.

[00:19:22.160]

It's not something that we long term see.

[00:19:24.480]

It also leads into a longer term perspective

[00:19:27.840]

on investing where it's yes, this thing might work for 3

[00:19:30.560]

months, 6 months, maybe even 12 months but generally

[00:19:33.680]

when either expectations are missed,

[00:19:37.280]

and we're starting to see a little bit of that here it's

[00:19:39.480]

like if you beat on earnings you're rewarded

[00:19:43.720]

decently, not crazily, if you miss you're getting smacked

[00:19:45.720]

pretty bad.

[00:19:47.040]

Even if you overall hit expectations

[00:19:50.600]

or beat but there's something within there, a particular

[00:19:53.160]

area of the company--

[00:19:53.880]

Could be a comment that could be...

[00:19:55.200]

--there's punishment going on.

[00:19:57.200]

I think you're absolutely right.

[00:20:00.000]

I think the markets, once again, we haven't seen the shift

[00:20:02.960]

to go defensive but at any sign of a crack it seems

[00:20:06.160]

like they're willing to get out.

[00:20:09.720]

We saw it with Meta not so long ago, it wasn't a bad

[00:20:12.440]

quarter, it was a bit under expectations and, obviously,

[00:20:15.120]

you saw overnight it was down more than 10%.

[00:20:18.000]

That's a massive market cap wipeout,

[00:20:21.400]

the size of value that was destroyed overnight

[00:20:24.440]

was quite large.

[00:20:27.120]

Not to say that that's going to continue happening but when

[00:20:30.040]

the market gets more and more lofty expectations

[00:20:33.200]

eventually we get ahead of ourselves.

[00:20:35.000]

I think the last point with regards to that in terms of why

[00:20:38.080]

we think our approach makes sense as we go forward, not

[00:20:41.040]

only for the long term, that's a no-brainer to us, even

[00:20:44.000]

in the shorter term we're starting to see the contribution

[00:20:47.160]

of a lot of those large tech names, contribution of

[00:20:50.080]

earnings to the total index is gradually decreasing.

[00:20:52.640]

That means there's other stuff that's working but not being

[00:20:55.240]

compensated for it.

[00:20:57.040]

The multiples you're paying for them might be getting a

[00:20:59.560]

little stretched.

[00:21:00.560]

Tell us about the exposure within the All-in-Ones to

[00:21:03.720]

those seven names, essentially.

[00:21:05.760]

I mean, historically, it's always surprising to me that

[00:21:08.320]

it's not as big as you might think.

[00:21:10.960]

We own some. Once again, I mentioned it at the top, they're

[00:21:14.040]

great businesses. It's just how much do you need to

[00:21:17.080]

own or do you want to own or which ones are going to be the

[00:21:19.160]

longer term winners. I think for the Mag Seven it's kind of

[00:21:21.920]

hard to make an argument that they're not going to be

[00:21:23.840]

around for a very long time.

[00:21:25.720]

It's more kind of those granular ones impacted by it.

[00:21:29.000]

We have right now I'd say between 18% to 20%

[00:21:31.960]

in the Mag Seven for our U.S.

[00:21:38.160]

equity allocation versus, like I said, double that, if you

[00:21:39.640]

will, for the index. Doesn't necessarily mean we can't ever

be

[00:21:41.080]

overweight. It truly depends on the screening

[00:21:44.280]

mechanism of our different factors.

[00:21:46.200]

They score well for quality, for the most part, and they

[00:21:48.680]

score really well for momentum, not so much for value,

[00:21:51.680]

not so much for low vol.

[00:21:53.480]

There could be a scenario where some of those eventually

[00:21:55.520]

score well for low vol.

[00:21:57.560]

If they have very stable earnings, which they do,

[00:22:00.760]

that's a screening criteria that we have.

[00:22:02.760]

If they display lower standard deviation than the broader

[00:22:05.520]

benchmark because tech has become

[00:22:08.520]

new world order, for example. This is just hypothetical

[00:22:10.440]

here that we're talking.

[00:22:11.720]

It's a staple, essentially, it becomes a staple.

[00:22:13.440]

It becomes a staple? Actually in 2020 there was

[00:22:16.440]

a few research papers that came out, is tech becoming lower

[00:22:20.080]

vol by the simple fact that we went through a global

[00:22:21.640]

pandemic. Yeah, consumer discretionary

[00:22:24.680]

spending came down, obviously, a lot of things were closed

[00:22:26.640]

but guess what, people aren't cancelling their Office 365

[00:22:29.160]

licence.

[00:22:29.840]

It becomes a whirlpool example.

[00:22:31.920]

Lots of things may sort of go out the window but you

[00:22:34.960]

always have to buy a new washing machine and you have to a

[00:22:37.360]

new phone. You have to buy it so it becomes a staple on

[00:22:39.280]

There's some things that you are going to...

[00:22:40.760]

then now it's because there's other things.

[00:22:43.120]

I'm digressing but really what I'm trying to get

[00:22:46.240]

to the point is we have less, it

[00:22:49.320]

doesn't mean we'll always have less.

[00:22:50.560]

We've had more in the past.

[00:22:51.920]

When you have these kind of rallies like this they

[00:22:56.920]

fall out of some of the scoring of certain factors.

[00:23:00.520]

There's some great questions coming in on this.

[00:23:03.160]

Can you explain the size factor and where it

[00:23:06.400]

sits within the All-in-One?

[00:23:07.920]

I'm assuming that means cap size but you'll take that one.

[00:23:10.800]

Size is small-caps, basically.

[00:23:12.640]

For us the way we see it is that over the long term we've

[00:23:15.120]

actually seen ... and it's actually very counterintuitive

[00:23:17.520]

to passive investing which you're rewarding the largest

[00:23:19.720]

companies. Historically, it's the opposite.

[00:23:22.240]

Generally small-caps, albeit you are taking more risk so

[00:23:25.120]

maybe from a Sharpe perspective there isn't that alpha

[00:23:28.160]

but there definitely is from a net returns basis.

[00:23:30.880]

Generally small-caps outperform large-caps.

[00:23:32.920]

That's the size factor.

[00:23:34.440]

The way that we incorporate it is through active

[00:23:36.680]

management. There's a few key reasons for that.

[00:23:38.920]

First of all, it's a very broad market

[00:23:42.000]

so trying to apply either a

[00:23:45.040]

quantitative screen to it or just saying we're going to buy

[00:23:47.400]

a small-cap index,

[00:23:50.840]

you're taking on significant risks of

[00:23:54.880]

the quality of the businesses that you're buying.

[00:23:57.360]

If you buy, say, the Russell 2000

[00:24:00.720]

there's 30, 40, sometimes even in worse

[00:24:03.680]

periods 50% of the stocks that are unprofitable.

[00:24:06.080]

There's 5 to 10 in the S&P 500.

[00:24:09.440]

It's a completely different type of index which also means

[00:24:11.800]

that active managers have shown greater

[00:24:15.000]

propensity to outperform.

[00:24:17.400]

They've outperformed more consistently and to a larger

[00:24:21.160]

alpha over time. That just goes back to academia

[00:24:24.200]

which recommends, just empirically, that

[00:24:27.200]

higher active share generally leads to more consistent

[00:24:29.920]

alpha.

[00:24:31.320]

You see that in the fixed income market.

[00:24:32.800]

It's easier to differentiate from a benchmark because your

[00:24:34.920]

benchmark has 5,000 bonds in there.

[00:24:37.920]

With small-caps it's kind of the same thing.

[00:24:39.240]

If your benchmark is 3,500 stocks and you hold 70,

[00:24:42.600]

obviously, your active share is like 99.8%, active

[00:24:45.760]

share being the percentage differentials in weights versus

[00:24:48.880]

your benchmark. We

[00:24:52.400]

have outstanding managers that we can use in

[00:24:55.360]

our Global Small Cap Opportunities ETF and fund.

[00:24:58.040]

That's the way that we--

[00:24:58.800]

This is Chris and Connor.

[00:25:00.080]

--yes, exactly, that we include in our portfolios.

[00:25:03.720]

The other question is why is quality and value,

[00:25:07.240]

why are they not as much of a factor in the

[00:25:10.280]

U.S. versus Canada and Europe?

[00:25:12.200]

Kind of coming back to you were mentioning at the beginning

[00:25:14.480]

a bit.

[00:25:16.200]

For value in the U.S.,

[00:25:19.160]

first of all, you're overweighting some of the smaller

[00:25:21.040]

sectors. You're basically

[00:25:24.200]

taking ... and it's kind of the opposite for Canada, when

[00:25:26.520]

you buy a Canadian value product you're overweighting

[00:25:29.520]

the largest sectors. You're overweighting materials,

[00:25:31.360]

generally, because they trade at a discount.

[00:25:32.840]

You're overweighting financials which generally trade at

[00:25:34.920]

lower valuations than, say, consumer discretionary.

[00:25:37.920]

But they're dividend paying, they're big old clunkers that

[00:25:40.640]

do well and have their revenue streams.

[00:25:42.480]

In the U.S.

[00:25:43.800]

you really need a period where the

[00:25:46.760]

heavier sectors like comm services, tech and consumer

[00:25:49.760]

discretionary, those lag.

[00:25:52.720]

Consumer discretionary is actually not doing so well but

[00:25:54.240]

comm services and tech are the two best sectors.

[00:25:55.760]

Those are underweight in value, hence

[00:25:58.800]

why you're lagging.

[00:26:01.480]

That's the number one thing I'd say.

[00:26:02.880]

For quality it's actually interesting.

[00:26:04.480]

It's just more of the fact that some of those lower quality

[00:26:07.280]

... because quality in theory is

[00:26:10.280]

working, it's just it's not outperforming as much as we'd

[00:26:13.080]

like it to or it's underperforming slightly because we

[00:26:15.760]

don't incorporate some of that nonprofitable space,

[00:26:19.160]

and really growing space, if you will,

[00:26:22.200]

but it is a place where we thought there would be stronger

[00:26:24.960]

returns given where we are in the cycle.

[00:26:26.840]

Do you think that the sectors, and you're mentioning

[00:26:29.760]

anti-factors which I might get you to just

[00:26:32.720]

explain, we have sort of a couple of minutes left, but just

[00:26:35.160]

what you mean by that. Factors are built to sort of isolate

[00:26:38.720]

something in particular and we're

[00:26:42.280]

in what some people call a melt-up so it's a different

[00:26:45.040]

moment for how factors, I guess, work.

[00:26:46.840]

Is that right?

[00:26:47.320]

Yeah, it's basically when you build a

[00:26:51.000]

quantitative strategy or factor-based strategy, smart beta,

[00:26:54.400]

your objective is to find a risk

[00:26:57.560]

premia that is rewarded consistently. If you, over

[00:27:02.400]

25, 30 years, 20 years, you pick stocks

[00:27:05.440]

that are on average cheaper than

[00:27:08.800]

the average stock, and definitely cheaper than most

[00:27:11.040]

expensive stuff, if I consistently buy those cheaper names

[00:27:14.120]

do I outperform versus buying

[00:27:17.320]

the more expensive names?

[00:27:18.600]

That is held true across multiple, multiple different

[00:27:21.520]

cycles. There are periods where the more expensive

[00:27:23.760]

companies outperform the cheaper companies.

[00:27:26.720]

Generally more short-lived, exactly what we're experiencing

[00:27:28.960]

right now, that's like the anti-factor.

[00:27:31.800]

It's basically the stuff that in academia and theory you

[00:27:34.720]

would be shorting, you would be long the cheap names and

[00:27:37.960]

short the expensive names. That's the way that it was

[00:27:40.040]

tested historically.

[00:27:41.640]

In practice we kind of just go long the cheaper names.

[00:27:44.400]

It would be the same thing for quality.

[00:27:48.320]

We like the very profitable names.

[00:27:50.120]

Well ,sometimes it's the unprofitable stuff that's working

[00:27:52.200]

more than the profitable stuff.

[00:27:54.480]

That's just periods where, once again, they're generally

[00:27:57.160]

short-lived, couple quarters, sometimes a year

[00:28:00.520]

but it doesn't really persist.

[00:28:02.520]

All-in-Ones are core product.

[00:28:04.080]

That's the way you think about those, where you've built

[00:28:05.920]

them. Just sort of remind everyone ...

[00:28:08.520]

I mean, diversification comes into something being core but

[00:28:11.000]

just kind of as a final thought

[00:28:14.000]

what's the value of core at this moment in these markets?

[00:28:16.440]

It offers diversification. It means that you're also not

[00:28:19.200]

missing out on certain opportunities.

[00:28:20.640]

We saw it with Canada.

[00:28:23.080]

We have 25% Canadian equities in the All-in-One ETF

[00:28:26.360]

portfolios of the equity sleeve, if you will,

[00:28:29.560]

a quarter of that is Canadian.

[00:28:31.360]

If you own only U.S.

[00:28:32.800]

you weren't benefiting from that. The diversification

[00:28:35.600]

argument this year is actually really good, albeit it would

[00:28:38.000]

have been great to just be concentrated in one theme, which

[00:28:40.320]

we've talked about at length.

[00:28:41.920]

You are seeing benefits of other areas working.

[00:28:45.240]

On the flip side of that being core and being diversified

[00:28:48.080]

will help if we see some volatility.

[00:28:49.800]

Even the couple days of volatility we saw the last week or

[00:28:52.600]

so that's where we really shine, where we outperform the

[00:28:55.560]

most.

[00:28:57.440]

Performance has been really good but having

[00:29:00.400]

a more strenuous risk

[00:29:04.400]

process helps us a lot

[00:29:07.520]

throughout a cycle. I think diversification is going to be

[00:29:10.160]

very important as we go forward.

[00:29:11.840]

Thanks for coming to Toronto and making the sun shine here.

[00:29:14.200]

You got stuck with the snow there but we're glad that

[00:29:16.400]

you've arrived here.

[00:29:18.280]

Étienne Joncas-Bouchard, thank you for joining us.

[00:29:19.240]

A pleasure, as always.

[00:29:21.440]

Thanks for watching or listening to the Fidelity Connects

[00:29:25.360]

podcast. Now if you haven't done so already, please subscribe to Fidelity

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And if you like what you're hearing, please leave a review or a five-star

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We'll end today's show with a short disclaimer.

[00:29:58.320]

The views and opinions expressed on this podcast are those of the participants,

[00:30:02.160]

and do not necessarily reflect those of Fidelity Investments Canada ULC or

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[00:30:12.640]

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[00:30:14.960]

Or an endorsement, recommendation, or sponsorship of any entity or securities

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[00:30:32.240]

Thanks again. We'll see you next time.

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FidelityConnects: The ETF roundup with Étienne Joncas-Bouchard

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