FidelityConnects: The ETF roundup with Étienne Joncas-Bouchard

[00:03:44] Pamela Ritchie: Well, hello, and welcome to Fidelity Connects. I'm Pamela Ritchie. With the Bank of Canada lowering rates by 25 basis points today to 2.5% how might investors take this on board with their investment decisions? As we mull through some of these big central bank decisions being made and their effect on the broader economy we're going to dive into the incredible interest in ETF investing which remains very strong across this country. In fact, Fidelity's All-in-One ETF lineup recently crossed a significant milestone, $10 billion in assets under management since inception. What's driving the popularity of ETFs, and more specifically, Fidelity's All-in-One ETFs, which factors may perform well in today's market environment? We'll go through all of this with someone. Very excited to be joined today by Étienne Joncas-Bouchard. He is Director of ETF and Alternative Strategies here at Fidelity. Warm welcome to you, Étienne. I think you just did this en français. We're glad to have a moment with you.

[00:04:45] Étienne Joncas-Bouchard: Yeah, absolutely, this is second show back to back and glad to be back on and share some insights with our audience.

[00:04:51] Pamela Ritchie: Delighted to have you here. Everyone can send questions in for the next half hour or so, any questions that come across. I wonder if we begin, just begin broadly with sort of the macro story because it is central bank week, and particularly today. Just your thoughts on kind of steadying the ship to the way you invest as we do see, it seems like shifting sand throughout the economy.

[00:05:18] Étienne Joncas-Bouchard: It's been, obviously, so far this year quite a whirlwind. We've had many distinct phases from our perspective when we look at it through a factor lens, if you will, from an equity perspective. That trickles down from anticipation of where economic growth is going to be going, where assets are going to be going, where earnings are going be growing faster than other areas. Obviously, central banks play a role in the anticipations of what markets are going be pricing into their valuation models, what they're going to be pricing into their anticipation of economic growth which eventually trickle down to the portfolios and ETFs that we manage. I'd say, obviously, we've got another big decision, you mentioned Bank of Canada, we've got another big  decision coming up with the Fed. From just a broader global market perspective I think the Fed having a larger impact. Markets are basically telling us that we better see a cut. There is an anticipation, I'd say, more on the options market, there's a higher than 100% probability that we get a cut. Obviously, having something else than that I think would be a major surprise and would have probably somewhat of a negative impact on global risk markets as much on the bond side as on the equity side.

[00:06:31] But overarching theme from our perspective is that there's somewhat of continuation of a late cycle environment globally. We have seen some things work in Canada and international markets that are telling us differently, and maybe we can get into that a little bit later, but really on the U.S. side things that have worked are extremely momentum-driven, concentrated return streams in underlying indices. These are all themes that I feel like we've been talking about for the past three years now but have continued to manifest themselves throughout this year.

[00:07:02] Pamela Ritchie: And as you say, there's some really interesting sort of factor nuances that we will discuss in just a minute. I'll ask you about flows and what you've seen. It's been an incredibly strong year as we started off saying there. Put that in perspective. We speak to you sometimes monthly, and take a look, actually, at the flows on a monthly basis. They're incredibly good through June, July, August. What numbers do you have at the tip of your fingertips right now?

[00:07:29] Étienne Joncas-Bouchard: The most recent we have is end of August, and we can go ahead and throw slide one up for our audience. It's kind of the typical chart that we share here just showing the different asset classes, different regions that are getting inflows on the Canadian ETF industry. I'd say the number one thing that's been quite astonishing this year is that, and I guess for better or worse, we used to get a little bit of a break in July and August which is great. We get some time off and take things a bit slower. That's not the case anymore. It feels like there's a continuation of momentum that's happened throughout the year. I think this is very similar to last year as well where usually Q3 is a little bit slower in terms of flows but as we can see on the screen here August coming in slightly above $7 billion in net new assets coming in. Year-to-date total is at 73, 74. We're basically a couple billion away from reaching last year's total which was a record-setting year. In fact, actually, I'll cheat here a little bit. We did get the first two weeks of September, we don't have them on screen but we have surpassed 76 billion so basically 2025 is now a record year of inflows in the Canadian ETF industry.

[00:08:37] Before I get into some of the key points to highlight here I will say that at Fidelity it's been an extremely positive year and I want to thank everybody listening to us right now who supported our various product lineups. We've had numerous milestones. We've hit 20 billion in assets. We've hit 10 billion in our All-in-One ETFs. These are all things that have happened over the past couple of weeks. That's mainly due, obviously, to the popularity of our All-in-One ETF portfolios, which are our FBAL, FGRO  and FEQT ETFs, are all in the top 20 selling ETFs in the country for the year so far, something that we would have never anticipated a couple years back. It is a market that's been heavily dominated by kind of the pure passive index products, especially U.S. equity products, S&P 500 ETFs are always popular and remain very large. We are truly carving our piece of the market here so thank you once again to everyone.

[00:09:29] If I shift to kind of just the industry more broadly, continuation of trends I think that we've seen so far this year that we've already talked about but we can hammer home once again, international equities continue to outsell Canadian and U.S. equities. In fact, in August we actually saw outflows on the Canadian equity side a bit more than double on the international outflows to the U.S. Obviously, note there that does include global mandates which have some U.S. exposure but nonetheless there seems to still be appetite for ex-North America, something that we're hearing from advisors in our conversations but also we're hearing from institutional investors that we talk to as well as ... I mean, it is reflected in the flow so there's hardly more that we can say there.

[00:10:08] Pamela Ritchie: Is that...

[00:10:08] Étienne Joncas-Bouchard: Equity is largely outselling — sorry, go ahead, Pamela.

[00:10:11] Pamela Ritchie: Well, I was just going to say does that really land at this point? Do you feel like that is not just a theme for this year or it's, you know, a few months? It's something that there has been a meaningful shift for, I guess, the long term is what I'm asking you, to international.

[00:10:31] Étienne Joncas-Bouchard: It's a great question. Even here at Fidelity we'll have deferring opinions. We can talk to certain portfolio managers, active portfolio managers that do have, say, an overweight exposure to international markets relative to what they've had in the past and they believe that this equity market performance will continue which would generally entail that we expect flows to continue. Flows tend to follow performance. From that perspective I think that's interesting. On the flip side  you have seen U.S. equity markets since April really catch up to international markets and vice versa. You've seen U.S. equity flows slowly start to play catch-up this year. There's a lot of tailwinds/catalysts that it feels like are a bit more in play that they were before because it's always been the story that international markets post great financial crisis feels like for a long time they've been trading at a discount, especially post 2012, let's call it, when there was the European banking crisis, 2011, 2012, there has been a discount on especially European equities and emerging market equities relative to the US but it was lacking a catalyst to consistently catch up to valuations that we're seeing in the U.S. equity markets, obviously, earnings growth being the number one player there.

[00:11:46] It seems like there has been a change in tone anyways with regards to what Europe is going to be doing in the next 5, 10, 15, 20 years with regards to spending, with regards to their monetary policy which is now a lot easier than what we're seeing in the U.S. You've seen weaker USD, that's a big help to a lot of the international markets. All these things are kind of coming together right now. I don't know if I can make a call that it's going to be super persistent or not but I wouldn't be surprised to see this continue just based off of the fact also that I think those regions have been really underweight in a lot of Canadian investors' portfolios over the decade, understandably so with the performance that we've seen. I think that's way below, say, what a neutral target would be for a global strategy.

[00:12:38] Pamela Ritchie: I wonder if this is a moment to take a look at the factors and take a look at sort of the business cycle slide that you've got. You've noted that momentum is still momentum and it's still a very important factor to take look at but sometimes the momentum of the types of stocks in different regions has been different. In the U.S. momentum means tech and everything that gets dragged along with kind of the AI theme and other things are attached to that. Europe doesn't have a whole lot of that and they have some momentum going but they're different stocks, basically, right?

[00:13:13] Étienne Joncas-Bouchard: It's a great point. We can throw up slide two while we're addressing this. This is a slide that we use very often in order to try and ... obviously, the data that we use to support trying to understand where we are is not reflected on the slide, it's a very oversimplification of this. Factor performance is also very telling of where we are from a market cycle. Right now, to your point, momentum is working everywhere. The reality, though, is that momentum looks very different from region to a region which kind of leads us to believe that international and Canadian markets, what they're seeing is that while momentum is working so is value. In the U.S. that is not the case up until, I'd say, the last month where we've seen somewhat of a broadening but it was basically momentum was growth. In two other markets momentum has been more the value side, overweights the sectors that are more cyclical like financials, industrials. You've also seen energy, for example, in international markets doing quite well. There's more overlap between our momentum and value factors in international and Canadian markets where in the U.S. it's not so much the case, which would then indicate that maybe it's more of a late cycle environment. A lot of those mega-cap growers do have a lot of strong quality characteristics which is also a factor that does well in the late cycle.

[00:14:35] Now, this is not a call to say one way or another. It's more kind of something that we've noticed and we're kind of looking under the hood to try and figure out exactly why this is happening. A lot of that I think has to do with monetary policy. As we've seen economic growth slow more in Canada and international economies it feels like maybe there's somewhat of a bottoming out there. It's not to say that we're re-accelerating by any means right now but there is maybe an anticipation that it will re-accelerate slightly before the U.S. does as it hasn't maybe hit somewhat of a bigger slow down. That's definitely an interesting development, I think.

[00:15:14] Pamela Ritchie: It's fascinating that you pointed that out. You can see it right there on that slide. You mentioned that perhaps the monetary policy is part of the reason where we are right now, certainly, but the fiscal policy seems to be what will kind of take over and is adding to some of the momentum, undoubtedly, because there are all kinds of promises across Europe of fiscal expansion and also Canada as well.

[00:15:41] Étienne Joncas-Bouchard: If we look at international markets, the sectors that are working, it feels like it's all tied to kind of this--

[00:15:46] Pamela Ritchie: Government spending.

[00:15:47] Étienne Joncas-Bouchard: --I guess change in fiscal policy that we heard about at the start of the year. We did see some implementations in Germany and things like that but we still need to see the goods to see that roll into the earnings of these businesses. Right now it feels like it's the anticipation of those earnings to come, they better come otherwise we might face more challenges. Sectors that have done really well in, say, the MSCI EAFE Index, you can look at financials are the number one leader, industrials have done really good, energy I mentioned earlier. In the U.S. it's tech, comm services. In both places consumer discretionary has not been good, maybe understandably so with everything that's going on with tariffs, prices and inflation on certain goods and things like that. It is very different sectors that are working which then manifests itself through factors which manifests itself through indices and et cetera, et cetera. But you have seen these wide differences in performance which, once again, it's not something that we see very often so we do point it out.

[00:16:52] Pamela Ritchie: That's really a fascinating piece.

[00:16:55] Étienne Joncas-Bouchard: The one guideline, though, or I guess, perspective that we can provide is just momentum has worked everywhere. It's a challenging environment for us in a certain way because if only momentum is working — for Canada and international, I mentioned value, it's picked up value which value is doing well as well — but in the U.S. when you're in an environment where only one of, say, our four main factors that we employ in our regional equity ETFs or our All-in-One ETFs, that's a period where there's a bit more, I guess, reliance or betting on beta where it's, basically, if it's volatile it's going to help my portfolio, if it's not volatile I don't want it, I don't want defence. You look at some of the sectors that haven't worked in the U.S., it's all the defences.

[00:17:40] There is a risk appetite when markets are rallying and there's anticipation that things are getting better, maybe rate cuts are coming, et cetera, but it is a little alarming that there's also been this much concentration, especially in the U.S. market. It's not to say that it can't continue but eventually there is a phase where there's a return to a broadening out. I feel like a broken record but, on average, if I look at all the calendar years of our back-tested indices that we've constructed on the factor side, on average there's about 2.8 of our four factors that outperform in a given calendar year. That's true as much for Canada, U.S. as international. In a year when you only have one that's more of an anomaly than something that's a regular occurrence which, historically, we're talking closer to three would outperform the broad market cap-weighted indices that they compete against.

[00:18:37] Pamela Ritchie: I wonder if there we can talk a bit about the way you construct the All-in-One ETFs, remind people for those that don't know. There are many ways to sort of begin this but one of them is that you do have exposure to all of the factors for a lot of different reasons because most of yours, as you just pointed out, are a little bit of everything and so you just kind of leave that exposure across the board. How are the All-in-Ones constructed? Just give us the one, two, three so we can kind of pull some of the threads on the stories of how they've been doing.

[00:19:06] Étienne Joncas-Bouchard: We can definitely pull up slide 3 to just show the entire lineup of portfolios that we've constructed. I guess there's a few key points that we thought of when we're constructing these portfolios. First of all is global diversification so these are globally diversified portfolios. We've got U.S. equities, Canadian equities, international equities, global fixed income, Canadian fixed income et cetera. We're trying to cover all bases from that perspective and asset allocation perspective. The second most important is style diversification. It's something that we've done extremely well from a historical perspective in our managed portfolios, our private investment pools that are actively managed by our Global Asset Allocation team, they're going to combine managers, active portfolio managers that have complementary styles in order to reduce volatility and enhance diversification. It's the same concept that we employ here with regards to factors. A value factor is generally complementary to quality, momentum is generally the opposite of low vol, that diversification adds a lot of value to the portfolio. The reason why we're taking exposure to all of these factors in a more equal-weighted approach way is that we know that these work over time but as we saw in the cycle slide they don't always work at the same time and they don't work all the time.

[00:20:23] A great quote that I like to share is factors work over time, not all the time. Having exposure to all the different factors allows us to capture that strategic alpha that they should generate over the long term without having the risk of being put in a corner because we're overweight a given factor. Yes, obviously, we would have loved to be way overweight momentum but if we go back to March, we would've loved to be overweight low volatility and value. The way that we've approached these is that we've got strategic management, we systematically rebalance them, turnkey solutions that have ... now we have six options so ranging from 100% fixed income to 100% equity and they've really become the flagship part of our lineup in terms of flows, also in terms of performance and recognition being really top performers in their category.

[00:21:15] Pamela Ritchie: They seem like flagship funds for a lot of investors because three of those that we just put up, I wonder if we can just stick those up for one more minute there, three of those have been in the top 20, you said, that have made it into the top 20 over the course of the last month, year, remind us.

[00:21:29] Étienne Joncas-Bouchard: Year-to-date, but even FBAL, FGRO and FEQT, I don't want to get this wrong but I believe for August they were fourth, sixth and eighth best-selling ETF in Canada. Really, we're in the top 20. I would have loved to be able to say we're in the top 10 year-to-date, we're not quite there yet. Who knows what the rest of the year holds.

[00:21:48] Pamela Ritchie: Give it time.

[00:21:51] Étienne Joncas-Bouchard: They've definitely been widely adopted among the advisor community. Using them in various different ways, as core in a portfolio but also we're getting more and more demand for FEQT, our All-in-One equity, is just a global equity mandate that's very core. Because of the different factor exposures you're bringing yourself more to a more disciplined sector allocation strategy, if you will, where we're not taking significant deviations to our benchmark but we are trying to win on security selection which is kind of the name of the game for factors.

[00:22:25] Pamela Ritchie: Let's go into that security selection. If you take the sort of equity sleeve or that particular fund which is all equity, it's not passive so you're not just owning every single equity that is in an index, for instance, but bring it home for us, how many are there?

[00:22:44] Étienne Joncas-Bouchard: It's going to vary big time when you include fixed income relative to the All-in-One equity. Let's take our Balanced ETF portfolio, the FBAL All-in-One Balanced, it's kind of the one that holds everything because it is right down the middle. That one will have between, let's say, 2,000 to 2,500 holdings which sounds like a lot but if I compare it to our main competitors in the space which use passive building blocks and index-based products. Another way that I kind of describe our process other than a funnel, which, realistically, it is a funnel, we're trying to get the best securities possible. A lot of the work that we do is not necessarily in saying we are going pick the best stock or the best bond, is using these quant screens, factor approaches that we have we're able to eliminate a lot of undesirable companies. It's easier for us to spot rotten apples than to find the one that tastes the best, if that makes any sense.

[00:23:53] That allows us to generate alpha over time because if we're able to eliminate companies that don't screen well for any of the factors ... let's just hypothetically say a company that's volatile, non-profitable, so quality, it's expensive, it's not value, and it hasn't had momentum because it hasn't worked recently, for us, that company, there's very little chance that it ever finds itself in our portfolios. I would argue that many advisors, many investors, would say there's no real fundamental reason to own a name like that. It can work in certain phases of the market like when everything is going up and it's just getting dragged up, rising tide lifts all boats type thing, but over the long term those types of companies generally will underperform versus its peers versus the rest of the index. That's a lot of the work that we do, filtering out a lot of the less desirable names.

[00:24:47] Pamela Ritchie: It's fascinating, and also when you go to the equity side of things and even if you're taking a look at sort of the all-American, it's always been surprising that you have exposure to the Mag Seven but not as much as others, and they've done so well. I wonder if you could sort of talk a little bit about performance without massive exposure to the Mag Seven. It's sort of a fascinating ... feels pretty unique, actually.

[00:25:16] Étienne Joncas-Bouchard: Absolutely. Obviously, it's been top of mind for everyone since 2023. It's funny because since '23 we've had 30 to 35% of equities outperforming the benchmark. Historically, we're closer to 50, 55% of equities outperform the broad benchmark. It's been 30% for the past two, three years. For us from that perspective it's interesting because our approach will lead us to own these names for a multitude of reasons.  One, they're extremely big companies. Will we own as much? Very rarely will we own as much of the very top of the indexes for the simple reason that you know they do have to screen strongly from a fundamental perspective. Obviously, they've screened well for momentum, a lot of them screen well for quality but they definitely don't screen that well for value and for low vol because they have been fairly volatile, to the upside, thankfully, for the most part, but nonetheless that still displays volatility. I will say that in our All-American Equity ETF we have, I think we're close to about 20, 22%, let's say 19 to 22% exposure on a given day relative to more than 30 for the benchmark. We still own those names quite handily but we don't own as much as the index. That's, from a risk perspective I think that's something that's fairly diligent.

[00:26:42] Pamela Ritchie: It's interesting. How would you sort of discuss the way investors are buying risk right now? It seems like momentum tells the story to a certain extent that they are interested in buying risk but I'm just wondering, from other stats that you get from various investors is there concern about what comes ahead, are a lot of investors looking through the next period if there is, in fact, a bit of a slowdown. That's certainly being discussed in Canada, it's also being discussed in the U.S. but equities often look through that. Is there any tepidness in terms of risk or investors are buying risk? That's really what we take from momentum.

[00:27:25] Étienne Joncas-Bouchard: It's fun to buy risk when things are going up but then there's always pullbacks. TI think the anticipations now that we have around monetary policy in the U.S. with the Fed, if we get a hawkish and kind of defensive Fed that could be a little bit of a ... or definitely be a big holdup for a lot of these growth names that have outperformed. I'm not saying that's going to happen. For all intents and purposes the market's antici-, and by the time we're recording right now we do not have the decision in front of us.

[00:27:58] Pamela Ritchie: But it's almost the path ahead, isn't it?

[00:27:59] Étienne Joncas-Bouchard: Absolutely. For us it's more thinking it's okay to take risk, it's okay to benefit in rising markets but we're always thinking of the long term picture, where we don't want to make make sizable bets, where we do want to make some bets. I'd say over the long term our approach of correlating to our benchmark but trying to out-, we try to do a bit better on the way up and a bit better on way down but we're not trying to shoot the lights out in an upswing market and we're not trying protect 40% of the downside of the market either. We're going to be fairly close  but that allows us to participate in upswings but it also helps us protect a bit in the downside.

[00:28:49] Momentum shifts so fast. It can happen in the blink of an eye where we go from momentum works like we saw in March and then next thing you know it's the worst performing factor. Hence why every day that we receive inflows in our portfolios we're allocating to the factors that have underperformed. Right now when we get trades from our advisors, from investors, we're not buying more momentum. We're buying a bit more low vol, we're buying a bit more value to come and try to keep this as close to a neutral mix possible in anticipation that there will eventually be some volatility.

[00:29:22] Pamela Ritchie: Just going back to sort of big bets one way or the other, this is a good way, perhaps to not do that but just discuss what April was like a little bit because it was an opportunity for many in a lot of ways but it was also one of those moments where you're trying not to catch a falling knife as well. Tell us a little about how the funds performed, and different ones will perform different ways, but how they're designed to perform through real disruption.

[00:29:46] Étienne Joncas-Bouchard: Absolutely. We can throw up slide 4. One of the slides that we love to share and we've now put together for our audience, and this is our last reporting date, just to explain kind of what we're seeing here is the attribution summary for our All-in-One Balanced ETF which basically highlights all the individual ETFs and positions that we have in the portfolio and then their contribution to total returns. The blue line is reflecting absolute contribution which is if you add all of it up it gives us our total return that we see at the top. All the green lines is the added value or, I guess, the tracking that we see relative to our benchmark. Any line that's above zero that's green is adding value, any line that is below is taking away some excess returns.

[00:30:40] The one consistent message, which we've already mentioned a few times, is really momentum has done really well, as much on the Canadian side as U.S. and international momentum, as well. That's the tickers FCCM, FCMO and FCIM. We have also seen just on the international side in general, that allocation because of the performance of those markets has been really good. We're not necessarily over, I mean, we're comparing to a benchmark that has a neutral allocation to international equities that we would have in the portfolios but because of slight drift we are slightly overweight international which has helped. Obviously, Bitcoin on an absolute basis has been positive but on a relative basis our benchmark does include Bitcoin. Relative to, say, our peers or competitors that is one thing that's been adding a little bit of value as well so far this year.

[00:31:27] Pamela Ritchie: That's great. There is a question rolling in. This is kind of how you consider currencies, what you have to do when you're building these products. How do you incorporate that or consider that?

[00:31:39] Étienne Joncas-Bouchard: We consider currency as ... and I'd say this is not necessarily a decision from our end, it's more from the portfolio managers that manage some of our fixed income strategies inside the portfolio, anything that's outside Canada on the fixed income side is hedged, for the most part. I'd there's very little flexibility there. I think our Global Core+ Bond is the only one that has some flexibility while the others are fully hedged. While we look at anything that's equity related we are unhedged so, obviously, the depreciation of the U.S. dollar here this year has been slightly a drag on performance if we're comparing to something that was hedged. Our benchmark, obviously, is unhedged given what we do. I'd say this is really kind of a standard across the industry. I don't know many ETF portfolios available on the market that would hedge their equities as much on the international side as on the U. S. side. We have seen in the past some on the international side but we actually see that one as a particularly additive call, if you will, just the diversification effect that we get from a basket of currencies instead of just the CAD to USD direct relationship which can be good or bad in any given year, it feels like, while international, it does add a little bit of diversification  having exposure to a multitude of currencies.

[00:32:52] Pamela Ritchie: I wonder just as we ask a final question of sort of what you think you want to leave with investors right now at this kind of interesting moment in the economy, for sure. Maybe we'll stick up the All-in-Ones. This is slide 3, just so people can have a quick look at the different funds themselves. What would you like to close out with as kind of a message to investors, Étienne?

[00:33:29] Étienne Joncas-Bouchard: Final message, first of all it's a big thank you. I think it's been an exceptional year for us at Fidelity. I'm sure for most people who use our portfolios or our ETS are very happy with the performance that we've delivered. We're extremely excited about the future. I will say keep an eye out for more innovative solutions that we're going to be coming out with this year, next year. We're consistently looking also at these portfolios to ensure that they're well diversified but also we're getting exposures to asset classes that make sense in the current environment. Once again, just a big thank you and we'll see you next time.

[00:34:01] Pamela Ritchie: Great. Étienne Joncas-Bouchard, thank you very much for joining us here today on Fidelity Connects. Coming up on the show over the next couple of days, tomorrow portfolio manager Lee Ormiston, he joins us to unpack what this week's central bank rate decisions may well mean for your clients and for fixed income markets more broadly. We'll be discussing that tomorrow on the show and that discussion will have live French audio interpretation so do join us in either official language.

[00:34:27] On Friday we look into what's shaping the global case for health care investing. This is with portfolio manager Alex Gold. He'll expand on the massive impact of U.S. policy on the sector and innovations and, of course, demographics and the overall case for where the sector itself may have bottomed and may be ready to move on. We'll discuss that with Alex on Friday.

[00:34:50] On Monday we welcome Director of Global Macro Jurrien Timmer as he dives into the latest macro themes that are on his radar and perhaps should be on yours as well. He'll also share pretty compelling charts and data to help kick off your trading week ahead. Thanks for joining us. Have a good rest of your day. I'm Pamela Ritchie.