What Makes Fidelity's Canadian Asset Allocation Etfs Different?

Prominent multinational fund managers in Canada, such as BlackRock (NYSE:BLK) and Vanguard, have understandably garnered significant attention and inflows with their asset allocation offerings. Local firms like BMO (TSX:BMO), Horizons, Mackenzie, and TD (TSX:TD) have also made substantial inroads in this domain.

However, the very simplicity that attracts many to these ETFs can also be their detracting factor. For the investment aficionados who relish the intricacies and nuances of crafting a portfolio, the broad-based stock and bond market index ETFs that underpin many asset allocation products might seem too vanilla.

Now, while I'm a proponent of the adage that "boring is good" when it comes to investing, I recognize that some might yearn for an asset allocation solution with a bit more flair.

Enter Fidelity Canada's offerings. The firm currently boasts 40 ETFs—readily searchable on the Cboe Canada ETF screener—with a handful falling into their "all-in-one" or asset allocation category. Read on for my analysis.

Overview of the Fidelity asset allocation ETFs

Before diving into the specifics of each ETF, it's essential to understand some common characteristics shared by these products. Here's what ties them together:

• They allocate to Canadian, U.S., and international equities. Notably, Canadian equities are overweight compared to their global market cap weights.
• Exposure to both Canadian and global fixed income.
• A unique twist: a small dose of crypto exposure is also present in these ETFs, showcasing Fidelity's forward-thinking approach.
• A nuanced breakdown of equity allocations into various factors. We'll delve deeper into this in the upcoming sections.

With the context set, let's examine the four main options from Fidelity's lineup, organized by increasing equity exposure:

1. Fidelity All-in-One Conservative ETF CAD (NLB:FCNS) (FCNS):
2. Fidelity All-in-One Balanced ETF (NLB:FBAL)(FBAL):
3. Fidelity All-in-One Growth ETF (NLB:FGRO) (FGRO):
4. Fidelity All-in-One Equity ETF CAD (NLB:FEQT):

Detailed analysis of the ETFs

For the purposes of this deep dive, I've chosen to focus on FBAL, as I think this ETF provides a comprehensive snapshot of Fidelity's strategy behind these funds.

As of October 24, 2023, here's how FBAL is divvying up its assets:

Bonds:

• Canadian Bonds: 29.5%
• Global Core Plus Bond: 9.7%

U.S. Equities (by factor):

• Momentum: 7.3%
• Low Volatility: 7.2%
• High Quality: 7.2%
• Value: 7.1%

International Equities (by factor):

• High Quality: 3.6%
• Low Volatility: 3.5%
• Momentum: 3.5%
• Value: 3.5%

Canadian Equities (by factor):

• High Quality: 3.5%
• Momentum: 3.5%
• Value: 3.5%
• Low Volatility: 3.4%

Crypto Exposure:

• Bitcoin: 2.6%

Other:

• Global Small Cap Opportunities (USD): 1.5%

Now, let's delve into Fidelity's rationale behind this allocation:

1. Factor Investing: The factors targeted by FBAL are ones that academic research and empirical data suggest contributing to outperformance over time:

• Momentum: Stocks that have been on an upward trajectory tend to continue outperforming, at least in the short term.
• Low Volatility: Historically, stocks with lower volatility have outperformed their more volatile counterparts.
• High Quality: Companies with robust balance sheets and stable earnings often outperform those of lower quality.
• Value: Stocks that appear undervalued relative to their intrinsic worth have historically provided superior returns over extended periods.

2. Crypto Exposure: It's worth noting the ETF's exposure to Bitcoin. While this makes up only 2.6% of the fund, due to the inherent volatility of cryptocurrencies, even such a seemingly modest allocation can have a significant impact on the fund's overall performance.

3. Bonds: On the bond side, Fidelity employs a "core plus" strategy. The core component is built around low-cost index funds, ensuring broad and diversified exposure at a modest price. The "plus" aspect introduces active management to manage risk and potentially enhance returns.

My thoughts on Fidelity's asset allocation ETFs

Fidelity's "ETF of ETFs" model is undeniably attractive. It offers a seamless foray into the world of factor investing without the hassle of manual allocation. Imagine trying to slice and dice a dozen factor ETFs individually! Fidelity's structure saves investors from that rigmarole.

Active management in the bond space with a core plus strategy is something I wholeheartedly endorse. Given the intricacies, nuances, and sometimes opaque nature of the bond market, an active touch can potentially navigate risks and maximize opportunities more adeptly than a strictly passive approach.

However, the inclusion of cryptocurrency in the portfolio feels a bit like sitting on the fence. Die-hard crypto enthusiasts will likely find the allocation too conservative, while traditionalists might question its presence altogether. It's an attempt to cater to both worlds, but whether it strikes the right balance remains to be seen.

Finally, in a world where every basis point counts, Fidelity's expense ratios, although not exorbitant, could be lower. While I understand that the active component, crypto, and the incorporation of factors add layers of cost, an expense ratio closer to the 0.30% mark would make these ETFs more enticing, especially compared to competitors who charge in the ballpark of 0.20-0.24%.

All in all, Fidelity's offerings bring a fresh perspective to the table. While there are elements I'd tweak, they present a robust alternative for investors seeking a balanced approach but with a modern twist.

This content was originally published by our partners at the Canadian ETF Marketplace.