The Upside: ETF miniseries part 2: ETFs explained like you’re 5

[00:00:43] Kyle Cheropita: Hello, everyone, and welcome to The Upside. I'm Kyle Cheropita. I'm here today with Meaghan Chandler and Cameron Bruce. Meaghan and Cam are investment analysts on the product research and product development team here at Fidelity. They are both experts on ETFs and our ETF product lineup. Welcome, Meaghan and Cam. Great to have you here today.

[00:01:01] Meaghan Chandler: Thank you.

[00:01:03] Cameron Bruce: Thanks for having us.

[00:01:03] Kyle Cheropita: This is part two of our ETF mini-series. Hopefully, the audience checked out the first episode which we aired featuring Audrey Kim and Max Naylor. They were talking about ETFs. We called it an ETF explain it like I'm five. That was part one. They really covered the basics and now today we're going to take it a little step further and get into multi-asset and, specifically, the Fidelity product lineup including All-in-Ones. Let's start right there. Turn to you first, Cam, maybe you could define for me what exactly is a multi-asset ETF.

[00:01:32] Cameron Bruce: Of course. Multi-asset ETF is exactly what it sounds like. It's an ETF that invests in multiple asset classes, think your bonds, your stocks, et cetera, and they package them into one portfolio, a one ticket solution. The motivation for them is kind of think when you're making your investment decisions you've got to choose geography, sector, style, securities, those kinds of things. There's risks associated with those. You don't want all your eggs in one basket type of thing. What we do is then we'll diversify across those asset classes and then we take on those decisions and we get to control all the things that are complicated with managing a portfolio, like rebalancing and trading and where to allocate where and whatnot. That's basically the crux of the multi-asset and why they're popular and why we're seeing interest in them right now.

[00:02:23] Kyle Cheropita: Very cool. Before we get to the Fidelity product lineup, multi-assets in general, have they been in the industry for a while now?

[00:02:30] Cameron Bruce: They've been around for a little while. Our product's been around for about five years, I think, our suite.

[00:02:34] Kyle Cheropita: But the industry before that...

[00:02:38] Cameron Bruce: Was much longer. I don't know the oldest one but it's been probably 10, 15 years that they've been in the Canadian market.

[00:02:45] Kyle Cheropita: It's a very popular product for diversification. Let's turn to the Fidelity product lineup, specifically the All-in-Ones. Meaghan, let's talk about those.

[00:02:52] Meaghan Chandler: The All-in-One suite comprises six different solutions ranging from a 100% fixed income to pretty much all equity with a bit of crypto. The other four solutions in between kind of range between those asset classes. What our All-in-One ETF suite aims to do is really what Cam kind of talked about, provide diversification in a very easy way for investors. They diversify from asset class level but also from regions, investment styles, market cap, all within one solution. A great way to think about it, at least for me, I'm not good at baking, I'm awful, so it's similar to, say, me baking my own cake versus me going to a bakery. If I'm baking my own cake I'm worried about finding the ingredients, did I add butter twice, is it cooked enough? It's a very hands-on approach, I would say, versus going to bakery to buy this cake, they have expertise, they have resources, it's more of a hands-off way. That's how I would think about our Fidelity All-in-One ETF suite. We're definitely trying to add value and do something a bit different than other competitors out there, which we'll be talking about today.

[00:03:55] Kyle Cheropita: Very cool. Your team loves their analogies. I think Audrey was referring to smoothies, I saw one with flowers, a bouquet, at one point as well.

[00:04:02] Meaghan Chandler: We've got a lot more coming for you today.

[00:04:04] Kyle Cheropita: So more episodes in the future. With the All-in-Ones, there used to be four, right, then we added a couple more, was it last year?

[00:04:11] Meaghan Chandler: Yeah, we've been slowly building out the suite. We initially had two, our balance and growth offering in 2021. We expanded again in 2022 with our all equity and our conservative offering. Like you mentioned, last year we expanded again for all fixed income and a conservative income offering.

[00:04:28] Kyle Cheropita: Very good. Now, what would you say, Meaghan or Cam, what makes the Fidelity All-in-One's distinct from other products in the market?

[00:04:36] Cameron Bruce: I can take that one. A lot of the competitors on the market utilize what we would call passive. Basically, what passive is, it's just replicating a broad market usually, think your 500 largest stocks in a specific market or index. To continue on the analogy, the cooking analogies, I think of passive like a recipe that you follow that's in a book, that a million different people have bought. It's not to say it's not going to be good food but it's a recipe that's been trodden, it's been used several times. What we do is we employ factor strategies, which we'll get more into, and active strategies. This is where we're actually taking active decision making and we're leveraging Fidelity's years of investment research and experience to try and provide some edge, or the potential for outperformance.

[00:05:35] Again, I would think of this as more like you're getting a chef-curated menu. I'm looking at what's in season, it's my style tilt, things like that that are then maybe going to add a little bit of extra flavour to your portfolio. That's kind of the idea. We also have a little sprinkle of Bitcoin in there which also makes it unique to some other competitors. I think those are kind of things that we do differently. We hope that it provides the potential for outperformance and better experience for clients.

[00:06:04] Kyle Cheropita: That's great. That sliver of crypto, that varies, I believe, between the different ones in the suite.

[00:06:09] Meaghan Chandler: That's correct.

[00:06:10] Kyle Cheropita: What is the breakdown there?

[00:06:13] Meaghan Chandler: Aas of today it currently ranges from .5% all the way up to 3%.

[00:06:18] Kyle Cheropita: Very nice. A little flavour depending on what the individual investor wants. Now, something else that the individual investor often focuses on are fees. If someone was to go to fidelity.ca and see, which they all should, if they want to read more about the products, and if they see performance listed is that performance number before or after fees.

[00:06:36] Meaghan Chandler: It's a great question and it's something that comes up a lot. Firstly, if you're curious about what the fee is you can always find that on our website, again, fidelity.ca.

[00:06:44] Kyle Cheropita: Yeah, there's handy product pages for every single...

[00:06:45] Meaghan Chandler: Exactly, exactly. You'll find it right at the top. Obviously, if you scroll down a bit further you're going to see our returns. Those returns are indeed posted net of fees, meaning we've already taken the fees off of those so if you're looking to compare our returns to a benchmark or a competitor solution know that we've already taken these off so you really don't need to worry about that.

[00:07:07] Kyle Cheropita: It's quite transparent. Well done everyone. Now, I wanted to pick up on something you said earlier, Cam, and that was about the factors. Let's talk more about factor investing. Who would like to chat more about that?

[00:07:16] Meaghan Chandler: I can take it. Different analogy, we're going to go with a sports team, but firstly, let's talk about what a factor is. A factor a measurable characteristic of stock or a group of securities that over the long term will exhibit a certain risk and return profile. Let's say you're trying to build a winning hockey team. There's so many players out in the world, how do you narrow down that grouping of players? You can take an approach where you search for certain characteristics. Let's say you're searching for speed. You may use a metric like they can skate over 10 kilometres per hour. Maybe that's slow, I don't know what a good metric to use is, but you can use that to narrow down for speed. That's basically how our factors work.

[00:07:59] We'll use different metrics to narrow down that broad universe. Similar to a team approach, not every characteristic is going to work in every environment. Let's say you play one team and maybe speed worked that time but another team a strong defence worked. That's similar to our factors. When we designed the All-in-One suite, we actually took an equal-weighted approach to the factors that we included. You'll find with factors, their leadership or when they outperform kind of shifts and it can shift kind of quickly.

[00:08:28] Kyle Cheropita: Like over a year or even over a full market cycle.

[00:08:30] Meaghan Chandler: Exactly, exactly. By taking a more diversified approach it can kind of create a smoother experience for the investor but you still capture the benefits of when each factor is really outperforming by having exposure to each one.

[00:08:42] Kyle Cheropita: Right. If we're going to carry on that sports team analogy, we're in the Olympics right now so, hey, pick the Canadian team, right, get those Canadians on the team. Go Canada. All right, next question I want to ask you, Cam. You have actively managed small-cap equity as an offering as well as active and systematic building blocks on the fixed income side, hoping you could explain a little bit more about how those two things add value.

[00:09:03] Cameron Bruce: Yeah, of course. That's pretty common across the market where you're going to see active management and fixed income and small-cap. I guess just to step back and define small-cap because not everybody's going to be familiar with that, small-cap is just going to be smaller publicly traded companies. They're not going to be your Nvidias and your Googles and your whomever, they're going to be smaller companies. The logic with this active management where we do more research and it's more hands-on and individualized, they're smaller companies so there's less research, there's less coverage of them out there, there's less opinions on them so that can afford us an opportunity to be differentiated in that way because it's not like those big stocks where there's thousands of people making decisions on it every day, there might only be a few. That just provides opportunity for research to really come into play.

[00:10:00] Fixed income is similar. The difference with fixed income is it's such a broad market. There's differences in the way that companies issue their equity in fixed income, which we don't need to get into, but basically the fixed income market is massive and way more fragmented. You've still got to call somebody to trade a corporate bond sometimes. Having expert and active management in that space can really, really pay off. To shift our analogy to now a tourist analogy or vacation analogy, it's kind of like vacationing in a less well trodden place. There's not a lot of tourist reviews or anything out there as opposed if you're vacationing in a typical vacation spot where everything's already been experienced, people know what's good, what's bad.

[00:10:43] Kyle Cheropita: You just wanted to bring up vacation analogies because you just got back from one.

[00:10:49] Cameron Bruce: I did, yeah.

[00:10:50] Kyle Cheropita: Welcome back to the cold. Let's turn to rebalancing now. Some of it happens in these funds, with you, Meaghan, why is rebalancing so important and what is Fidelity's protocol behind rebalancing?

[00:11:01] Meaghan Chandler: With the All-In-One ETF suite they all go through an annual rebalance but beyond that, like a plane on autopilot, planes can naturally drift over time. Let's say there's wind, it's pushing it off course, an autopilot will kind of step in and automatically bring the plane back to the course. That's same with our ETFs. They are automatically rebalanced if they surpass a certain threshold between those annual balances. What's really important about rebalancing is what you'll find naturally over time is your winners may make up a really big proportion of your portfolio, which sounds great in theory, but what could happen with that is you may no longer be aligned with your investment objective and your risk tolerance by them making up such a big proportion.

[00:11:46] Kyle Cheropita: Would it be safe to say an investor picked that fund or ETF based on those factors, those characteristics?

[00:11:51] Meaghan Chandler: Exactly, exactly. As it shifts over time it's something to consider, that you should be rebalancing back to make sure you're still aligned with your own financial goals. Obviously, that can be a lot of work so having a product that can do it for you can certainly make it a lot easier.

[00:12:06] Kyle Cheropita: Great. Expanding on those products, I'll turn to you, Cam, we have so many ETFs we've been talking about today, is it safe to say there is a perfect ideal investor for each product? Do you have anything to say about that? Which ETF is best suited for which person?

[00:12:20] Cameron Bruce: Using our All-in-Ones sort of as our ... they're our one ticket so it's hard to assign, you know, this is going to be right for you, this is going to be right for you. We basically have a suite all the way from all fixed income to all equity. Basically, they just range from conservative to balanced to growth to all equity. Basically, you just want to think about it, if you're conservative or you're income seeking, that's when you're going to want to look at a higher fixed income allocation. We have a conservative income. We have All-in-One fixed income and then we have All-in-One conservative. These are going to, as indicated in the name, on the conservative side, lower risk, lower return but more steady and more income-oriented, which can be helpful for people with lower risk tolerances, maybe you need this money in five years or something, you can't survive a downturn.

[00:13:13] Smack dab in the middle we have balanced which is going to be more of an even mix between equities and fixed income. You can consider this probably still a little bit conservative but more on the neutral side for your risk tolerance. Then we have our growth and our equity, respectively. Growth still has a bit of a bond sleeve in it and then equity is all equity, as it sounds like. Those are for somebody like myself, I'm more interested in the long run, I'm thinking 30-year time horizon. I'm not spending money on anything, definitely not buying a house or a car or anything like that.

[00:13:47] Kyle Cheropita: Maybe just another trip.

[00:13:49] Cameron Bruce: Maybe. That is sort of where that comes in, when you have longer time horizons, longer risk tolerances, that way you can go for that higher risk return profile.

[00:14:00] Kyle Cheropita: That's great, Cam. Turning to you, Meaghan, are there any other notable multi-assets available at Fidelity?

[00:14:06] Meaghan Chandler: For sure. Another suite we have available is our Fidelity managed portfolios. Previously we only had them available in a mutual fund but last year we actually expanded to offer them in an ETF series. They're similar to the All-In-Ones in that they are globally diversified, multi-asset class product but a little bit different in the management. Our All-in-Ones follow a strategic mix versus the Fidelity managed portfolios, or FMPs, are actively managed by Fidelity's Global Asset Allocation team led by David Wolf and David Tulk who have decades of...

[00:14:39] Kyle Cheropita: Many years of experience.

[00:14:40] Meaghan Chandler: Exactly. with them it's a little bit different from that sense. They have the capability to overweight or underweight different asset classes based on where they're seeing opportunities from a big picture economic trend sense but also from what they're hearing from our bottom-up portfolio managers as well. Both suites are great, they can be solid options for you, it just really depends on what someone may be looking for.

[00:15:07] Kyle Cheropita: That's great. They are a great team to hear from. We actually had David Wolf in the studio here with us earlier today for our live advisor show, Fidelity Connects. I always love hearing from that group. Now, before we wrap up today one final question, Meaghan, is there anything we didn't cover today? Maybe a few tips about the All-in-Ones before we wrap up.

[00:15:23] Meaghan Chandler: For sure. Three things I'd like to leave you with for the All-in-Ones, they're simple, they're different from what you're going to find out there, and they're providing you diversification. It really takes all the thoughts of portfolio management potentially off of your plate to make it an easy process. If you're looking to learn more there's a few ways, you can check out our website, fidelity.ca, you can definitely tune into the other Upside webcasts. Even you can talk to if you have a financial advisor as well. Definitely do your research, see if something like this could be the right fit for you. Definitely consult our website if you're looking to learn more.

[00:16:01] Kyle Cheropita: That's great. That was going to be part of my close anyway so thank you for covering it. We love bringing in folks like yourself to share your information with our investors. There's plenty more information out there if anybody wants to go to fidelity.ca or tune into any of the podcasts like this. Meaghan, Cam, thank you both for joining me here today. Hopefully, you too will tune in to watch part three of this which is Vince and Nicole which we're going to be airing next. Hopefully, all of you tune in as well. That's it for today's show. If you didn't watch the first episode in this series, that was the one with Audrey and Max, I strongly recommend you looking that one up on YouTube.

[00:16:35] In general, please follow us on our socials including Instagram, YouTube, LinkedIn, Facebook, and Reddit for more great content and the latest financial updates. You can also head to fidelity.ca's investor education section to check out our articles, sign up for The Upside newsletter, get information about the upcoming live webcasts and on-demand videos. Whether you're learning investment basics or looking for more advanced knowledge we can help you become a more informed investor. As always, working with a financial advisor is among the best investments you can make. Thanks for watching. I hope you'll join us again on The Upside. I'm Kyle Cheropita.