Fidelity Connects: ETF investing tips for the second quarter

Étienne Joncas-Bouchard, ETF Strategist

Thursday, April 20th, 2023

Clearly it has been a volatile year, how has the ETF space fared so far?

• Seen about 10.6 billion in net new assets enter the Canadian ETF industry this year
o To put that into perspective, all last year was around 35 billion, which was the third best
year in history for ETFs
o Étienne believes that all else equal we're on our way to go on beat that
• One of the main categories that Étienne was tracking last year, which had been increasingly
popular was the high interest savings segment, which was up 9 billion last year
o Seen another 2.7 billion in the first quarter of the year
• There’s currently a buying spree in international equities and a selling of US equities
• Solid year in terms of flows in the ETF industry.

It's always amazing to me that the space in Canada continues to do well, even in times of volatility.
Why do you think that is? Are investors continuing to figure out the benefits of ETFs?

• The ETF vehicle has shown now through various periods its resilience and its utility
o The fact that you can trade it throughout the day
o Use case is still very strong
o In terms of pricing the average ETF price is generally lower
• The tools that are available such as asset managers at Fidelity and investment vehicles that are
good at portfolio construction

There’s a lot of money going to bonds. What are you seeing when you dig into that asset class?

• 5.4 billion has gone into bonds this year and about half of that has gone as the cash alternatives
• One category that's increased is long term bonds
• Short end is still very high because central banks have stopped hiking rates or are on their way
to

You're seeing the outflows on the short-term side and they're big. I guess you can see that movement
into the long term based on where the yields are going.

• Short term mandates are down about 1 billion, while the long-term bond mandates are up 1.4
billion
• At the same time, cash alternatives are also raking in a bunch of flows
• Very contradicting where there's still some investors that are not ready to go back into the bond
market, but those that are in the market are positioning themselves for the long term

Is there insight into the data as to where internationally funds are going and why at the expense of
the US?

• International has historically been a strong underweight

• US earnings growth over the past decade has been significantly higher than it has been in
international developed markets like Europe or Japan
• Investors in general last year had a lot of reasons to avoid international due to various
geopolitical risks including inflation risk which is higher in the UK than it is here
 Fidelity Connects: ETF investing tips for the second quarter
Étienne Joncas-Bouchard, ETF Strategist
Thursday, April 20th, 2023
What factors are you looking at? What are factor ETFs?

• Want to select stocks based on fundamental criteria’s that drive performance

• With a pure passive ETF, what you're really doing is you're picking stock based on market cap
• The only metric or characteristic that you look at is the size of a business
• If we pick stocks in a big index and funnel it down to a certain amount of names
o Approximately 100 top deciles
o Do these stocks in the long term add value, are they better investments than just buying
the broad index?
o What Étienne found is generally speaking yes
o This can be applied for various investment styles or factors

Do the Fidelity ETFs factors change based on different environments? How are you adding and taking
stocks or bonds out of them?

• Have set rebalancing periods

• Able to adapt to current conditions to ensure you’re always getting the desired exposure
• The names might be different, the sector's might be different, but it's always going to be highly
profitable businesses with value
• There are some factors that have more turnover
o Étienne mentions momentum as an example

How do economic factors impact rebalancing, and the factors that people might want to consider for
their portfolios?

• Factors tend to be very cyclical

• In a late cycle slash recessionary phase like we are in now, factors like quality and low volatility
tend to do better
• When you're in the early cycle value tends to do better
• In looking at manufacturing and services PMI, you see that inflation is starting to roll over
• The economy is entering a modest slowdown
• High quality stocks have been the focus as those businesses generally do well coming out of a
slowdown and are able to weather inflationary pressures better
• Inflation coming down is a positive sign, however Étienne believes that the market is too
optimistic as to when rate cuts will happen

Where have you seen inflows into dividend ETFs? Are people still getting more defensive? Even if
things are settling down from a rate hike and inflation perspective?

• Canadians tend to really like dividend paying stocks

o If you’re getting a strong dividend yield it could be a way to slightly control total return
o With uncertainty as to where equity markets are going at least you’re getting paid to
wait
• If you are buying dividend ETFs or dividend funds, it's important to understand what type of
dividend strategy you're getting. Because some of them are lower volatility and some are more
growth
 Fidelity Connects: ETF investing tips for the second quarter
Étienne Joncas-Bouchard, ETF Strategist
Thursday, April 20th, 2023
• There was a lot of dividend buying when rates were at zero
o Étienne isn’t too confident now that rates are around 4%

Are these factor ETFs, fully invested all the time? Or are there more times where they're holding cash?

• If you're an active manager, you have the flexibility to add cash

• Dividend ETFs in comparison to dividend funds at Fidelity, allow the manager to hold cash and
protect a bit better to the downside

How do you see or recommend people use these factors? Is it watching the market and moving in and
out depending on where things are going, or being invested in all of them? How do you approach this?

• Depends on the practice that you run

• Étienne mentions different ways he’s seen advisors use these factors
• First, he mentions strategic exposure to a given factor
o You want to have value stocks as an exposure all the time
o In the long-term it will help diversify versus other things in the portfolio
o Academia would say that value tends to add alpha over time
• Secondly, he mentions tactical
o He recommends doing a pairing with things that have low correlation to each other such
as quality and value
• Lastly, he mentions buying all
o Can be done though Fidelity’s all-in-one ETFs comprised of momentum, low vol. value
and quality

That structure where you have everything in one ETF has done really well. What have you seen, and
why do you think that's becoming a much more attractive ETF option than buying individual ones?

• The main reason it’s growing in popularity is due to its simplicity

• Ensuring broad diversification

Could you talk about the different kinds of offerings?

• Four different options available

• Conservative having 60% fixed income
• Balanced is 60/40
• Growth at 85/15
• 100% Equity mandate

What are you looking at now economically?

• Looking at earnings
• As mentioned, markets may be overly ambitious on expecting rate cuts
o Same thing on the consensus with earnings growth prospects which this year is around
minus 1.4%
• From a macro standpoint Étienne is looking at international equities as well