Fidelity's X Shares Etf Strategy: Pros And Cons

Fidelity Investments offers a range of exchange-traded funds (ETFs) to its clients. These ETFs cover various sectors and industries, such as technology, healthcare, financials, consumer discretionary, and industrials. The company also provides ETFs that focus on sustainability, dividend income, and low volatility. Additionally, Fidelity has introduced ETFs that provide exposure to emerging trends like electric vehicles, future transportation, and real estate. With a diverse selection of passive and actively managed ETFs, Fidelity enables investors to pursue different management styles and strategies to meet their investment goals.

Fidelity's ETF investment options

Fidelity Investments offers a range of exchange-traded funds (ETFs) to its clients. These ETFs cover various asset classes, including traditional investments and alternative assets like commodities, currencies, and cryptocurrencies. ETFs are bought and sold like company stocks on stock exchanges and offer several benefits to investors, such as lower costs, tax efficiency, and transparency. Here is an overview of some of the ETFs offered by Fidelity:

Fidelity Enhanced Large Cap Core ETF

This ETF follows a U.S. equity strategy by investing in companies with attractive characteristics while maintaining a large-cap core profile.

Fidelity Total Bond ETF

The Fidelity Total Bond ETF seeks to provide investors with a high level of current income by investing in a diverse set of global fixed-income securities across different markets.

Fidelity Fundamental Large Cap Growth ETF

This ETF aims to provide exposure to large-cap growth stocks by combining active management and fundamental research capabilities, bringing together investment ideas from a select group of Fidelity portfolio managers.

Fidelity Wise Origin Bitcoin Fund

The Fidelity Wise Origin Bitcoin Fund offers investors exposure to the price of Bitcoin without the need to buy it directly. It is designed for investors with a high-risk tolerance and provides an opportunity to invest in Bitcoin through brokerage, trust, and tax-advantaged accounts.

Fidelity Blue Chip Growth ETF (FBCG)

The Fidelity Blue Chip Growth ETF invests in domestic large-cap companies with high earnings growth potential and sustainable business models that may be undervalued by the market.

Fidelity Disruptive Automation ETF (FBOT)

This ETF focuses on companies leading the way in automation and artificial intelligence, including industrial robotics and autonomous driving.

Fidelity Metaverse ETF (FMET)

The Fidelity Metaverse ETF invests in technology leaders and emerging businesses that are helping to create the new digital world through digital content, infrastructure, and wearable technology.

Fidelity Nasdaq Composite Index ETF (ONEQ)

This ETF tracks the performance of the Nasdaq Composite Index, providing exposure to a diverse range of companies listed on the Nasdaq stock market.

Fidelity Low Volatility Factor ETF (FDLO)

The Fidelity Low Volatility Factor ETF is designed for investors seeking portfolio protection against significant market downturns. It has offered smoother returns and higher income yields than its competitors.

Fidelity MSCI Information Technology Index ETF (FTEC)

This ETF invests solely in technology sector stocks, benefiting from the strong performance of this sector over the past decade. It has a low annual expense ratio compared to its peers.

Fidelity Sustainable U.S. Equity ETF (FSST)

The Fidelity Sustainable U.S. Equity ETF is an actively managed fund that focuses on ESG investing. It aims for long-term growth by investing primarily in U.S. companies with strong environmental, social, and governance practices.

Fidelity High Dividend ETF (FDVV)

The Fidelity High Dividend ETF is a passively managed fund that aims to replicate the performance of the Fidelity High Dividend Index. It invests in large- and mid-cap companies with sustainable and growing dividend payouts.

Fidelity Low Duration Bond Factor ETF (FLDR)

The Fidelity Low Duration Bond Factor ETF invests in bonds with maturities of one year or less to minimize the impact of rising interest rates on bond values. It focuses on high-quality corporate and government bonds.

Fidelity Electric Vehicles and Future Transportation ETF (FDRV)

This ETF invests in companies related to electric vehicles and future transportation technologies, such as Tesla, Analog Devices, and NXP Semiconductors. It provides exposure to the growing demand for electric vehicles and energy-efficient transportation.

Fidelity MSCI Real Estate Index ETF (FREL)

The Fidelity MSCI Real Estate Index ETF is a passively managed fund that tracks the MSCI USA IMI Real Estate Index. It invests in real estate investment trusts (REITs), benefiting from inflation and providing a reliable income stream through high dividend payouts.

The advantages of ETFs

While there is no specific mention of X Shares in relation to Fidelity Investments' ETFs, there are several advantages to investing in ETFs in general.

Exchange-traded funds (ETFs) are an increasingly popular investment vehicle, offering a range of benefits to investors. Here are some of the most prominent advantages:

• Trading flexibility: ETFs can be bought and sold during market hours, providing intraday liquidity. This allows investors to react to market movements and make timely investment decisions.
• Lower costs: ETFs often have lower expense ratios compared to mutual funds. This is because the administrative burden and client service-related expenses are passed on to brokerage firms, reducing overhead costs for ETF companies. Additionally, ETFs do not charge a 12b-1 fee (annual marketing fee).
• Tax efficiency: ETFs are generally more tax-efficient than mutual funds due to lower turnover and the in-kind creation/redemption process, resulting in fewer capital gains taxes passed on to investors.
• Greater transparency: ETF holdings are typically disclosed on a regular and frequent basis, providing investors with greater visibility into their investments.
• Potential tax benefits: The structural differences between ETFs and mutual funds can result in lower capital gains taxes for ETF investors. Capital gains taxes are only incurred when an investor sells an ETF, whereas mutual funds pass on these taxes throughout the life of the investment.
• Portfolio diversification and risk management: ETFs offer exposure to a wide range of asset classes, sectors, and industries, allowing investors to quickly gain diversified exposure to specific areas of interest.
• Versatility: ETFs can be traded like stocks, providing the flexibility to move money between different asset classes, such as stocks, bonds, or commodities.
• Reinvestment of dividends: ETFs allow for the immediate reinvestment of dividends, providing a potential advantage over mutual funds, which may have varying timing for reinvestment.

The disadvantages of ETFs

While ETFs are popular with investors, they are not without their drawbacks. Here are some of the disadvantages of investing in ETFs:

Fees and Costs

Although ETFs are generally cheaper than other lower-risk investment options, they are not free. Trading ETFs on the stock exchange incurs fees, which can range from $8 to $30 and are paid every time an investor buys or sells shares in a fund. These fees can add up, especially for investors who buy small amounts of shares on a continuous basis. Additionally, ETFs have expense ratios, which measure the percentage of an individual's investment paid to the fund annually. While expense ratios for ETFs are typically less than 0.5%, they can impact an investor's total returns.

Tracking Errors

ETF managers aim to keep their fund's investment performance aligned with the index it tracks. However, this can be challenging due to factors such as the need to swap out assets or make changes to the fund. As a result, the ETF's performance may deviate from the index, leading to tracking errors, where the ETF's cost exceeds the value of its underlying assets.

Liquidity and Trading Volume

Some ETFs trade at low volume or high volatility, making it challenging for investors to sell them. The "bid-ask spread," which reflects the difference between the price an investor pays for an ETF and the price it can be sold for, can indicate potential liquidity issues. If there is a large spread, the ETF is considered illiquid.

Capital Gains Taxes

ETFs that include dividend-paying stocks or generate capital gains through asset sales can distribute cash to investors, triggering tax liabilities. Shareholders are responsible for paying associated taxes, and the tax treatment varies depending on the ETF's policy.

Limited Diversification

While ETFs offer a high level of diversification, some ETFs are more narrowly focused on specific sectors, countries, industries, or asset classes. Investors in these ETFs may have limited exposure to mid- and small-cap companies, potentially missing out on growth opportunities.

Lower Dividend Yields

Although there are dividend-paying ETFs, the yields may be lower than those obtained by owning high-yielding stocks or groups of stocks. Investors willing to take on the risk of owning individual stocks can potentially achieve higher dividend yields.

Intraday Pricing and Emotional Trading

Intraday pricing movements can induce longer-term investors to trade unnecessarily or make emotional trading decisions. However, a long-term investor's strategy should ideally focus on the pricing at the end of the day rather than intraday fluctuations.

Skewed Leveraged ETF Returns

Leveraged ETFs use financial derivatives and debt to amplify the returns of an underlying index. However, these speculative investments can result in losses greater than the value change of the tracked index, especially if held for an extended period.

ETF investment strategies

Exchange-traded funds (ETFs) are a cost-effective way to invest in multiple securities at once while maintaining the liquidity of owning individual stocks. They are traded on exchanges such as the Nasdaq and the New York Stock Exchange (NYSE). ETFs are liquid, have low expenses, and have low purchase levels. They are also tax-efficient and offer greater flexibility than mutual funds.

• Diversifying your portfolio: Diversifying your portfolio into asset classes such as stocks, bonds, or real estate allows you to get the most return for the amount of risk you're willing to take. A basic mix might include domestic stocks, international stocks, and bonds. Conservative investors will have more bonds in their portfolios, while aggressive investors will have more stocks, with a higher number that are international.
• Multi-asset ETFs: These include types of assets such as stocks, bonds, real estate, or cash within a single fund. The fund managers decide how much to invest toward your investment goal. An aggressive multi-asset ETF with a goal of capital appreciation might include emerging markets and small-capitalization stocks. A conservative multi-asset ETF with a goal of earning income might include investment-grade bonds and blue-chip stocks.
• Index ETFs: These are a simple way to invest in broad segments of the stock, bond, real estate, and commodities markets. They follow a large stock index such as the S&P 500.
• Style and factor ETFs: Investment styles within asset classes will often perform differently depending on economic conditions. ETFs are available for any investment style. For example, you can invest in ETFs that track the CRSP (Center for Research in Securities Prices) small-cap value stock index or the Bloomberg Capital U.S. High Yield Corporate Bond Index. Factor ETFs focus on companies with certain financial or trading characteristics, such as strong balance sheets or an upward price trend.
• Sector and industry ETFs: Each sector of the economy is tracked by an index, and some industries within those sectors are also tracked. There are ETFs for all sectors and industries, from e-commerce to energy.
• International ETFs: Economic and political conditions can favor some areas of the world more than others. International ETFs can be used to capitalize on growth opportunities in different countries and regions. The largest international ETF tracks the FTSE index of developed countries other than the U.S.
• Socially responsible ETFs: Socially responsible investing evaluates companies based on how well they support environmental, social, and governance (ESG) issues. There are about 150 socially responsible ETFs available on U.S. markets.
• Risk management ETFs: Inverse ETFs show gains when an index is down and losses when it's moving up. Common inverse ETFs track the S&P 500. Long/short ETFs in this category buy and short-sell underlying investments based on share-price factors.
• Leveraged ETFs: These are designed to deliver a multiple of an index return on a daily basis. A 2x S&P 500 ETF is designed to double the S&P 500 return daily. Leveraged ETFs are right for experienced investors who understand their risks.

ETFs can be used as building blocks for almost any type of investment goal, from basic to highly sophisticated hedging. They can be used by new investors to take advantage of professional money management and by seasoned investors to capitalize on certain areas of opportunity.

The future of ETFs

The exchange-traded fund (ETF) market has experienced significant growth since the concept was introduced in 1993. As of September 2023, the US ETF industry was valued at $7.3 trillion, up from $4.3 trillion in pre-pandemic years. By the end of August 2023, there were 9,904 ETFs worldwide, up from 729 in 2006 and 6,952 in 2019. This growth is expected to continue, with projections indicating that global ETF assets under management (AuM) will reach at least $18 trillion by 2026, and possibly over $20 trillion, representing a 14.6% to 17% compound annual growth rate (CAGR) between June 2021 and June 2026.

This growth will be driven by several factors, including the introduction of new types of ETFs, such as crypto ETFs, and the increasing popularity of online platforms for ETF distribution. The COVID-19 pandemic also highlighted the resilience and growth potential of ETFs, as they were bolstered by a surge in fund inflows, new entrants, and product innovation.

• Innovation and Differentiation: The ETF market is becoming increasingly active, diverse, and innovative. While equity and fixed-income products remain the largest segments, we are seeing the emergence of new types of ETFs, such as thematic ETFs, active ETFs, and crypto ETFs. These new ETF types offer investors differentiated strategies, environmental and social responsibility, and the ability to connect with contemporary themes.
• Digital Distribution: The pandemic-driven shift to digital advice and online platforms is expected to continue, lowering costs, improving accessibility, and attracting new investors, particularly in less developed markets like Asia-Pacific and Latin America.
• ESG Focus: There is a growing demand from investors, regulators, and societal stakeholders for sustainability considerations to be integrated into the financial landscape. This will drive the development of new ESG-focused ETFs, with many providers already revamping their operations to meet this demand.
• Regulatory Scrutiny: As the ETF market becomes more complex, larger, and more retail-focused, it will inevitably face closer regulatory scrutiny. This includes increased attention to the use of bespoke indices and the growing significance of ESG to retail investors.
• Active vs Passive ETFs: While passive ETFs that track a benchmark index have traditionally dominated the market, there is a growing trend towards active ETFs that offer differentiated strategies to beat the market. This shift is driven by investors seeking environmental and socially responsible investment opportunities and contemporary themes.
• Cost Considerations: ETFs tend to be cheaper than mutual funds, which is a driving force behind their market growth. However, the high cost of setting up an ETF infrastructure can be a challenge for smaller funds. This has led to the emergence of white-label ETF service providers, who offer a cost-effective solution for launching ETFs.
• Global Expansion: ETF providers are expanding into new markets, particularly in the Asia-Pacific and Latin American regions. This expansion will contribute to the scale and market reach of the ETF industry.

In conclusion, the future of ETFs looks bright, with continued growth in assets under management, new ETF launches, and capital inflows expected. The key trends of innovation, digital distribution, ESG focus, and regulatory scrutiny will shape the ETF landscape, offering investors new opportunities to diversify their portfolios and access a range of asset classes.

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