Asset Management Fidelity to Offer Smart-Beta ETFs in Europe

As active funds come under fire for generating low returns, Fidelity plans to split the difference and offer European investors exchange-traded funds that do more than track indexes.
Fidelity will be offering their new smart-beta ETFs on Deutsche Börse's XTF segment. Photo: Reuters

From Monday on, fund manager Fidelity International plans to offer European investors smart-beta ETFs, a type of exchange-traded fund that relies on a more targeted investment strategy, according to information obtained by Handelsblatt. Fidelity already offers various ETFs in the United States.

"We have been thinking about ETFs for several years now. But we are still an active company," Nick King, head of ETFs at Fidelity International in London, told Handelsblatt. This explains the decision for the smart-beta version. Fidelity does not want to compete in Europe against the large providers of classic index funds, which is why Mr. King plans to use the "expertise of active management and thus stand out from the competition."

The move puts Fidelity in the growing ranks of active fund managers that are supplementing the expertise of portfolio managers with computer models. Active funds have come under growing criticism for often being expensive and generating lower returns than passive index funds.

Smart-beta ETFs have both active and passive characteristics. As opposed to simply tracking an index, they use quantitative models and specially designed strategies to make investment decisions. They are also cheaper than traditional actively managed funds.

Fidelity’s smart-beta ETFs will begin as two funds that focus on U.S. and global stocks from solid companies with high dividends. Products that focus on European stocks and stocks from emerging economies will follow.

The funds will be traded on the stock exchange in Frankfurt and cost 0.3 percent and 0.4 percent a year.

According to Mr. King, smart beta products make up a fifth of the $2.6 trillion (€2.43 trillion) ETF market in the United States. In Europe, however, they amount to less than one tenth of the €570 billion in ETF assets. He believes a doubling in Europe within five years is possible and sees a growing appetite for alternatives to classic index products among experienced investors.

Experts see this as an ambitious goal, as the market is already bustling with a wide range of providers. And consultants are often reluctant to sell the ETFs because they generate lower commissions than active funds. Jan Altmann of consultant 4Assetmanagement calls the European market "difficult," noting that even large investors often do not understand these funds.