Welcome to Fidelity

Select a location so we can provide you with the appropriate information

Bienvenue chez Fidelity

Veuillez sélectionner un pays afin que nous vous communiquions l'information appropriée

Willkommen bei Fidelity

Wählen Sie Ihren Standort aus, damit wir Ihnen die für Sie passenden Informationen anzeigen können.

Benvenuti in Fidelity

Seleziona un paese in modo da consentirci di fornirti le informazioni appropriate

フィデリティのウェブサイトへようこそ

適切な情報を表示するため、現在お住まいの地域を選択してください。

Important information

I confirm that I am accessing this website for the purpose of acquiring information as, or for, an Institutional Investor (a corporate or other non-retail investor acting for their own account).

By accessing the restricted area I confirm my agreement with‚ and understanding of‚ the following terms of use and the legal provisions. If I do not agree to the terms and legal conditions‚ I must not access this website or any pages thereof. I acknowledge that access to the information contained on this website is available to "Qualified Investors" only as defined below. A private individual or legal representative or any other party without this qualification should not enter this website.

By accessing this website or any of its pages‚ I confirm that I am a qualified investor in accordance with Art 10.3 CISA.

The following are considered to be qualified investors:

  • supervised financial intermediaries such as banks, securities dealers‚ management companies and asset managers of collective investment schemes‚ as well as central banks;
  • supervised insurance companies;
  • public-law bodies and occupational pension institutions with professional treasury;
  • companies with professional treasury.

I understand the information contained in this website is not directed at, nor is it intended for distribution to, or use by, persons in any jurisdiction in which the dissemination of such investment related information is not permitted. I also understand that the information contained in this site is not directed to any party that may be defined as a ‘retail investor’ by the home regulator of the country in which the website is being accessed. I understand that the information or opinions contained herein should not be construed as an offer to sell or the solicitation of an offer to buy any investment product nor shall any such investment products or services be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful. Fidelity has expressed its own views and opinions on this website, and these may change and there is no obligation to update them. Nothing in this website should be construed as investment, tax, legal or other advice. The information contained herein is subject to change without notice.

I understand the information contained in this website is not directed at, nor is it intended for distribution to, or use by, persons in any jurisdiction in which the dissemination of such investment related information is not permitted. I also understand that the information contained in this site is not directed to any party that may be defined as a ‘retail investor’ by the home regulator of the country in which the website is being accessed. I understand that the information or opinions contained herein should not be construed as an offer to sell or the solicitation of an offer to buy any investment product nor shall any such investment products or services be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful. Fidelity has expressed its own views and opinions on this website, and these may change and there is no obligation to update them. Nothing in this website should be construed as investment, tax, legal or other advice. The information contained herein is subject to change without notice.

This website has been issued by FIL Fund Management Limited, a Bermuda company licensed to conduct investment business by the Bermuda Monetary Authority. Neither FIL Fund Management Limited, its parent company FIL Limited, nor any of their group companies or affiliates makes or gives any warranty or representation that any information contained on this website is accurate, complete, or fit for any particular purpose.

I acknowledge that neither FIL Fund Management Limited, FIL Limited, nor any of their group companies or affiliates will have any liability for any losses arising directly or indirectly from any information accessed from this website. By accepting this representation I also confirm my agreement to the website Terms and Conditions, which I have read and understood.

Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited, a company existing under the laws of Bermuda.

If the above representation is correct, please click 'I agree' below to continue to the site.

Information importante

Je confirme accéder à ce site Internet afin d’obtenir des informations en qualité d’investisseur institutionnel.

Je comprends que les informations contenues sur ce site Internet sont destinées exclusivement aux investisseurs résidant en France et ne doivent pas être diffusées à quiconque pouvant être considéré comme un investisseur particulier. Je comprends que les informations ou opinions présentées sur ce site ne constituent pas des recommandations d’achat ou de vente. Fidelity a exprimé ses propres vues et opinions sur ce site Internet, et celles-ci peuvent évoluer sans que Fidelity n’assume aucune obligation de les actualiser. Aucun élément de ce site Internet ne doit être interprété comme un avis d’investissement, fiscal ou juridique ou autre. Les informations que comporte ce site peuvent changer sans notification.

Ce site Internet est présenté par FIL Gestion, SGP agréée par l'AMF sous le n°GP03-004, 29 rue de Berri, 75008 Paris. Ni FIL Gestion, ni sa société mère FIL Limited, ni aucune des sociétés ou affiliées du groupe ne garantit ni ne fait aucune déclaration sur l’exactitude, l’exhaustivité ou l’adaptation à une finalité donnée des informations présentées sur ce site Internet.

Je reconnais que ni FIL Gestion, ni FIL Limited, ni aucune des sociétés ou affiliées du groupe n’assume une quelconque responsabilité au titre de toute perte découlant directement ou indirectement de toute information obtenue à partir de ce site Internet.

Ce site présentant des informations en langues française et anglaise, j’accepte de recevoir des informations non exclusivement rédigées en français.

Je confirme également, par l’acceptation de cette déclaration, mon accord sur les conditions et modalités du site Internet que j’ai lues et comprises.

Fidelity, Fidelity International, le logo Fidelity International ainsi que le symbole F sont des marques déposées de FIL Limited.

Si vous accepter les termes de la déclaration ci-dessus, veuillez cliquer sur « j’accepte » ci-dessous pour poursuivre votre navigation sur ce site.

Wichtige Informationen

Hiermit bestätige ich, dass ich diese Website zur Informationsbeschaffung als institutioneller Anleger (ein auf eigene Rechnung handelndes Unternehmen oder ein anderer nicht als Privatanleger geltender Investor) bzw. für einen institutionellen Anleger besuche.

Mit dem Zugriff auf den zugangsbeschränkten Bereich bestätige ich, dass ich die folgenden Nutzungsbedingungen und rechtlichen Klauseln verstanden habe und mit ihnen einverstanden bin. Andernfalls darf ich auf diese Website oder Teile davon nicht zugreifen. Mir ist bewusst, dass der Zugang zu den Informationen auf dieser Website nur für „qualifizierte Anleger“ gemäss untenstehender Definition vorgesehen ist. Eine Privatperson, ein rechtlicher Vertreter oder irgendeine andere Partei ohne diese Qualifikation sollte nicht auf diese Webseite zugreifen.

Mit dem Zugriff auf diese Website oder Teile davon bestätige ich, dass ich ein qualifizierter Investor gemäß Art 10 Absatz 3 des schweizerischen Bundesgesetzes über die kollektiven Kapitalanlagen bin.

Als qualifizierte Anlegerinnen und Anleger im Sinne dieses Gesetzes gelten:

  • beaufsichtigte Finanzintermediäre wie Banken, Effektenhändler, Fondsleitungen und Vermögensverwalter kollektiver Kapitalanlagen sowie Zentralbanken;
  • beaufsichtigte Versicherungseinrichtungen;
  • öffentlich-rechtliche Körperschaften und Vorsorgeeinrichtungen mit professioneller Tresorerie;
  • Unternehmen mit professioneller Tresorerie.

Mir ist bewusst, dass sich die Informationen auf dieser Website nicht an Personen richten bzw. für sie bestimmt sind, in deren Land die Verbreitung solcher anlagebezogenen Informationen nicht erlaubt ist. Mir ist bewusst, dass die hier zu findenden Informationen oder Meinungen nicht als Aufforderung zum Kauf oder Verkauf eines Anlageprodukts zu verstehen sind. Es sollen auch keine solchen Anlageprodukte oder Dienstleistungen Personen angeboten oder verkauft werden, in deren Land ein entsprechendes Angebot, eine Aufforderung, ein Erwerb oder Verkauf ungesetzlich wäre. Fidelity äußert auf dieser Website seine eigenen Ansichten und Meinungen, die sich jederzeit ändern können, ohne dass eine Verpflichtung zur Aktualisierung besteht. Kein Inhalt dieser Website ist als Beratung in Bezug auf Geldanlagen, Steuern, rechtliche oder sonstige Aspekte zu verstehen. Die hierin enthaltenen Informationen können sich ohne entsprechende Mitteilung jederzeit ändern.

Mir ist bewusst, dass sich die Informationen auf dieser Website nicht an Personen richten bzw. für sie bestimmt sind, in deren Land die Verbreitung solcher anlagebezogenen Informationen nicht erlaubt ist. Mir ist ebenfalls bewusst, dass sich die Informationen auf dieser Website nicht an Adressaten richtet, die von der Aufsichtsbehörde in dem Land, von dem aus die Website besucht wird, möglicherweise als „Privatanleger“ klassifiziert werden. Des Weiteren ist mir bewusst, dass die hier zu findenden Informationen oder Meinungen nicht als Aufforderung zum Kauf oder Verkauf eines Anlageprodukts zu verstehen sind. Es sollen auch keine solchen Anlageprodukte oder Dienstleistungen Personen angeboten oder verkauft werden, in deren Land ein entsprechendes Angebot, eine Aufforderung, ein Erwerb oder Verkauf ungesetzlich wäre. Fidelity äußert auf dieser Website seine eigenen Ansichten und Meinungen, die sich jederzeit ändern können, ohne dass eine Verpflichtung zur Aktualisierung besteht. Kein Inhalt dieser Website ist als Beratung in Bezug auf Geldanlagen, Steuern, rechtliche oder sonstige Aspekte zu verstehen. Die hierin enthaltenen Informationen können sich ohne entsprechende Mitteilung jederzeit ändern.

Diese Website wurde von FIL Fund Management Limited eingerichtet, einem Unternehmen mit Sitz auf bzw. nach dem Recht der Bermuda-Inseln, das über eine Genehmigung der Bermuda Monetary Authority zur Ausübung von Investmenttätigkeiten verfügt. Weder FIL Fund Management Limited noch sein Mutterunternehmen FIL Limited oder irgendein anderes Konzernunternehmen oder verbundenes Unternehmen übernimmt die Gewähr dafür oder erklärt, dass die Informationen auf dieser Website zutreffend, vollständig oder für jedwede Zwecke geeignet sind.

Ich erkenne an, dass weder FIL Fund Management Limited noch FIL Limited oder ein anderes Konzernunternehmen bzw. verbundenes Unternehmen für etwaige Verluste haftet, die direkt oder indirekt aus einer auf dieser Website beschafften Information resultieren. Durch Annahme dieser Erklärung bestätige ich auch mein Einverständnis mit den Nutzungs- und Geschäftsbedingungen dieser Website, die ich gelesen und verstanden habe.

Fidelity International, das Fidelity International Logo und das F-Symbol sind Markenzeichen von FIL Limited, einem nach dem Recht der Bermuda-Inseln eingetragenen Unternehmen.

Diese Website präsentiert Informationen in englischer und deutscher Sprache. Als professioneller Anleger akzeptiere ich hiermit, Informationen in mehr als einer Sprache zu erhalten.

Wenn die obige Erklärung zutrifft, klicken Sie bitte auf „Ich stimme zu“, um auf die Website zu gelangen.

Informazioni importanti

Confermo di voler accedere a questo sito web per acquisire informazioni in veste o per conto di un Investitore istituzionale (una società o altro investitore non retail che agisce per proprio conto).

Riconosco che le informazioni contenute in questo sito web non sono dirette né sono destinate alla distribuzione o alluso da parte di soggetti in qualsiasi giurisdizione in cui la diffusione di tali informazioni relative allinvestimento non è consentita. Riconosco inoltre che le informazioni contenute in questo sito web non sono dirette a soggetti che potrebbero essere definiti "investitori retail" dall'autorità di vigilanza nazionale del paese dal quale si accede al sito stesso. Riconosco che le informazioni o le opinioni contenute in questo sito web non devono essere interpretate come un'offerta di vendita o come la sollecitazione di un'offerta di acquisto di un prodotto o un servizio di investimento, né tali prodotti o servizi di investimento possono essere offerti o venduti a soggetti di giurisdizioni nelle quali tale offerta, sollecitazione, acquisto o vendita sarebbero illegali. Questo sito web contiene giudizi e opinioni espressi da Fidelity, che sono soggetti a modifica e rispetto ai quali non sussiste alcun obbligo di aggiornamento. Nulla di quanto contenuto in questo sito web va considerato come una consulenza di investimento, fiscale, legale o di altra natura. Le informazioni qui riportate sono soggette a modifica senza preavviso.

Questo sito web è pubblicato da FIL Fund Management Limited (una società delle Bermuda autorizzata a svolgere attività d'investimento dalla Bermuda Monetary Authority). Né FIL Fund Management Limited, né la sua società madre FIL Limited, né alcuna delle loro società del gruppo o affiliate fornisce o rilascia alcuna garanzia o dichiarazione che le informazioni contenute in questo sito web siano accurate, complete o adatte a uno scopo particolare.

Riconosco che né FIL Fund Management Limited, né FIL Limited né alcuna delle loro società del gruppo o affiliate si assumono alcuna responsabilità per eventuali perdite derivanti direttamente o indirettamente da informazioni ottenute da questo sito web. Accettando questa dichiarazione confermo anche di aver letto, compreso e accettato i Termini e le condizioni d'uso del sito web.

Fidelity International, il logo Fidelity International e il simbolo F sono marchi di proprietà di FIL Limited, una società costituita nelle Bermuda.

Se la dichiarazione di cui sopra è corretta, cliccare "Accetto" qui sotto per continuare a visitare il sito.

重要な情報

私は、機関投資家(自己勘定取引を行う個人投資家以外の法人その他の投資家)として、あるいはかかる機関投資家のために、当ウェブサイトにアクセスし、情報を取得するものです。

私は、当ウェブサイトに掲載される情報は、かかる投資関連情報の流布が違反となる法域の人物に提供するものではなく、そういった人物によって拡散されたり利用されたりすることを意図したものでもないことを理解しています。また、当サイトに掲載される情報が、ウェブサイトにアクセスする場所の国の規制当局によって「個人投資家」と定義され得る人物に向けたものではなく、当サイトにある情報または意見は、何らかの投資商品の勧誘や募集と解釈すべきではなく、かかる投資商品またはサービスの募集、勧誘、売買が違法となる法域にいる人物に対して募集ないし販売されるものでもないことも理解しています。フィデリティは、当ウェブサイト上に自社の見解や意見を掲載していますが、これらは変わる可能性があり、そういった変更があった場合に当ウェブサイトを更新しなければならないという義務は負っていません。当ウェブサイトの内容はいずれも投資、税務、法務、その他の助言と解釈すべきではなく、ウェブサイト上の情報は通知なく変更される可能性があります。

当ウェブサイトはバミューダ籍の法人でバミューダ金融庁から投資事業免許を取得しているFILファンド・マネジメント・リミテッドが作成しています。FILファンド・マネジメント・リミテッド、その親会社であるFILリミテッド、またはそれらのグループ会社か関連会社のいずれも、当ウェブサイトに掲載される情報が正確であるとか、完全であるとか、特定の目的に適合したものである等の保証や表明は行っておらず、そういった保証や表明を提供することもありません。

FILファンド・マネジメント・リミテッド、FILリミテッド、またはそれらのグループ会社か関連会社のいずれもが、当ウェブサイトから入手した情報によって直接または間接的に発生した損失の責を負うものではないことに了承します。

フィデリティ・インターナショナル、フィデリティ・インターナショナルのロゴおよびFのシンボルはバミューダ法の下で設立された法人であるFILリミテッドの商標です。

以上をご確認いただける場合には、以下の「同意します」ボタンをクリックしてください。

Under the bonnet of passive investing: fees and costs are not the same thing

by David Buckle Head of Investment Solutions Design, Dorcas Phillips Director, ETFs, Sudi Gupta ETF Analyst, Max Dawe Senior Manager, ETFs and Raji Menon

Published 4 June 2018

Asset allocationETFsPassive investing

Passive investing is enjoying a golden age. Inflows into exchange-traded funds (ETFs) and index funds have soared by some $2.6 trillion over a ten-year period ending 2017, whereas active investment strategies have seen outflows of over $2 trillion during the same period. (1)

Investors are rushing into passive products with the aim of achieving low-cost exposure to specific asset classes, without the risk of significant benchmark underperformance. But it’s not as simple as these impressive numbers suggest. It is important to understand the risks and hidden costs as well the benefits that come from investing in passive instruments.

As with any investment, selecting the right passive strategy, and the vehicle, requires a thorough understanding and an in-depth evaluation of existing options to ensure investors’ expectations match reality. Assessing the type of passive product, its structure, benchmark, details of the market segment, and index used to create a proxy for it are all critical factors that need to be considered carefully - as well as fees and costs.

Structure of the product

When considering a passive investment, investors first need to decide the type of instrument that is likely to be suitable for their investment portfolio - these could be index mutual funds, ETFs or derivatives. If investing in ETFs, which have emerged as the vehicle of choice for many passive investors, the choice is then between physical and synthetic ETFs.

While a physical ETF invests in an index’s securities, a partial synthetic or synthetic ETF uses derivatives such as swaps to track the underlying index. Whether ETF or tracker, physical or synthetic ETF, all these different passive instruments will deliver differing return and tracking profiles. Different passive instruments will also pose varying types of risk and offer varying levels of liquidity.

Investors also need to examine whether some instruments offer better exposure to certain sectors and regions. For example, synthetic ETFs provide better access to emerging markets and non-metal commodities where physical ETFs are often not the best solutions for replicating market performance. Synthetic ETFs can be cheaper in illiquid markets where their tracking may also be more precise. Non-metal commodities can only be accessed synthetically because of the difficulties associated with storage.

Considering the structure of the passive product very carefully can help identify the most appropriate vehicle to balance market exposure, return, risk and liquidity.

Understanding underlying exposure

Passive investors need to consider their exposure and identify what is actually being tracked. No two indices are the same. For example, an investor wanting exposure to North American large-cap equities can choose from several different indices ranging from the MSCI USA, the MSCI North America, the Dow Jones Industrial Average, and the S&P 500. These indices may cover the same market, but offer differing exposures - for example, the MSCI USA tracks 600 leading US stocks, while the S&P 500 tracks 500 large-cap stocks. Beyond these, there are at least 12 other alternative indices for small and mid-caps as well as equity factors - which include dividend-focused, growth and value. With such an array of choices, investors need to consider the composition of different indices to weigh up the type of exposure they want.

Geographic tilts may be embedded in some of the indices. Most of these benchmarks are typically market-capitalisation weighted, which means they often have large-cap bias and are heavily concentrated in certain countries and sectors. For example, China accounts for around 30 per cent of the MSCI Emerging Market Index - this figure could go as high as 42 per cent after the country’s A shares are included in the index. Over 60 per cent of the MSCI World Index is concentrated in just the US.

Analysing the benchmark’s exposure is key. Two seemingly comparable indices may have small but significant differences. The FTSE Emerging Market index does not include South Korea in its portfolio weighting, while the MSCI Emerging Markets does - and in turn exposure to Samsung, which rose by 40 per cent in 2017. This had an impact on the performance of the two benchmarks: the FTSE EM index returned nearly 32 per cent last year, compared with 37 per cent for the MSCI EM index.

Source: MSCI, FTSE, Fidelity International, May 2018
Mifid returns table5-year returns table
Source: Thomson Reuters Datastream, Fidelity International, May 2018

Past performance is not a reliable indicator of future results

Manager method and skill

In an ideal world, index funds would perfectly track their benchmark indices. But as this is not possible, investors need to understand the varying methods of measuring how well a fund tracks its benchmark. The difference between the return of the benchmark and the index is measured in two ways - tracking difference and tracking error. Tracking difference represents the difference in the return of the fund and the index, while tracking error is defined as the volatility of the tracking difference.

It is important for investors to understand some key criteria which drive this difference between fund performance and its benchmark index.

This difference can come from:

  • Fund charges
  • Index tracking method
  • Fund manager skill

Fund charges are incorporated within the fund and can create a drag on performance when compared against the index. This fee can have a significant impact on returns over the long term, so ensuring that the price of a fund is competitive should be a key consideration.

When physically replicating an index, fund managers often employ one of two tracking methods. The most common of these is full replication. This means creating an index portfolio comprising all relevant securities in the index according to their relative weight. This ensures tight tracking and means the characteristics of the fund are virtually identical to the index. But this can be difficult in some more illiquid markets and buying shares in every component means transaction costs mount up.

The second method is sampling. This involves purchasing a selection of the securities that make up the index. This approach helps to mitigate liquidity issues or a large number of holdings in the index. The sample aims to match the fundamental characteristics of the index and to track its returns. This technique, however, increases the possibility of tracking error between the fund and the index.

Regardless of the technique employed by the manager, their skill, defined by how effectively they execute their chosen method, still matters. This skill can be difficult to isolate and is often assessed by tracking error which can be minimised by managing cash flows effectively and minimising transaction costs.

Fees and costs are not the same thing

The surge in passive investing has largely been due to the low fees compared to active products - but do they represent the true costs?

The focus on headline total expense ratio (TER) for ETFs can often be misleading. For example, passive high-yield exposure with a low TER, may end up much more expensive after accounting for associated costs as the following example shows.

..
Liquid high-yield index = Markit iBoxx USD Liquid High-yield index; standard high-yield index = BofAML US High-yield Index.
Source: Bloomberg, 4 June 2018

Bid-ask spreads can push up overall costs of the product. In liquid markets, such as US equities, the spreads are narrow, in contrast to more illiquid markets like emerging markets and high-yield corporate debt where spreads can be much wider. The narrower the bid-ask spread, the lower the cost to trade. As bid-ask spreads are a function of liquidity, they are a critical component to the total costs of ownership. A wide spread can eat into the overall returns.

The premium/discount to net asset value for ETFs in more illiquid markets can also be very volatile. The iShares USD High Yield Corporate Bond UCITS ETF, a popular high-yield ETF highlighted in the graph above, ranged between a 1.29 per cent premium to a 1.78 per cent discount over the last two years - an enormous difference, particularly given this was a relatively quiet period for high-yield investors. Generally, premia or discounts tend to be short-lived, but investors should check before buying or selling an ETF.

iShares USD High Yield Corporate Bond UCITS ETF (IHYU LN Equity). Source: Bloomberg, April 2018

Liquidity-driven benchmark decisions

Liquidity of the underlying asset class or holdings as well as liquidity of the instrument need to be weighed up. An ETF is only as liquid as the underlying securities within the index it tracks. It can be expensive to replicate an index in illiquid asset classes and a lack of liquidity can create significant risks for investors in adverse market conditions or during increased market volatility.

In asset classes such as high yield corporate bonds, ETFs tend to track a liquid version of the standard high-yield benchmark in order to offer a scalable product with intra-day liquidity. These custom liquid benchmarks tend to underperform consistently as they don’t benefit from the illiquidity premium which the standard high-yield index is exposed to.

In other words, in certain asset classes such as high-yield debt, the ETF may be tracking a very different index - or may be using a different benchmark to the one the investor wants exposure to.

Investors should also review their strategic asset allocation (SAA) and take into account the impact of lower returns in the liquid index. This would alter the risk-return profile in the SAA.

Rebased to 100 from Jan 2013. Liquid high-yield index = Markit iBoxx USD Lq HY; standard high-yield index= BofAML US High-yield Index. Source: Bloomberg, April 2018

The performance of the product in volatile market conditions also needs to be considered. In normal market conditions, there are two-way flows and ETF investors benefit from buying and selling in a secondary market. In stressed markets, however, sellers rapidly outnumber buyers. Unlike mutual funds, ETFs don’t have the option of holding cash, so when investors ask for their money back, an ETF manager potentially has to the sell the underlying assets in the market at whatever price they can get. When they sell, they do not pick the riskiest or most liquid markets first, but a slice of the entire underlying index. This can have a significant impact on performance and transaction costs, and can potentially take many unwary investors - who were expecting tracking of the benchmark with low fees - by surprise.

ETF liquidity matters - if the underlying assets are illiquid, then it may be difficult to sell these investors or they may not achieve a reasonable price. The risks rise in stressed markets when trackers stop tracking underlying indices or when derivatives are used to maintain tracking synthetically.

..
Source: Bloomberg, Fidelity International, June 2018

Past performance is not a reliable indicator of future results

Securities lending

One practice which has allowed managers to cut the fees for passive funds is stock lending whereby assets in a fund are loaned on to third parties in exchange for a fee which is usually split 60/40 between investor and fund manager. Some, though not all, ETF providers have stock lending programmes in place to partially, or in some cases, completely offset their management fees.

Stock lending is not always to investors’ benefit. The biggest risk from securities lending is counter-party default, where borrowers of these assets may not be able to return them. Much of this risk is mitigated by the borrower posting collateral to a third party, which the lender controls in the event of a default.

But the quality of this collateral is important as the risk is 100 per cent with investors, not the fund manager. An investor in a FTSE100 tracker could find themselves the unwitting owner of Korean small caps. Furthermore, any income generated by stock lending is unlikely to offset the risks, especially in market downturns.

Getting to grips with currency hedging index exposures

When investing outside local markets, returns are subject to currency risk. In response, some index products track a monthly hedged index. This fixed monthly hedging makes performance reconciliation relatively straightforward. However, the frequency can make the hedging less effective if there is a big variance between the hedge and the portfolio in between rebalances.

More complex is a dynamic hedging methodology. This assesses the currency exposure of the underlying assets and adjusts the hedging position daily, based on the movements of the relevant securities, triggered by thresholds being breached. This approach is likely to result in a more accurate hedge and potentially a purer investment outcome for investors compared to a monthly hedge process. However, these products tend not to have a relevant index as a reference for performance measurement.

Conclusion: Be active with your passive allocation

As with all investment strategies, investors in passive strategies need to be clear about their strategic objectives and understand all the relevant risks before investing. Before allocating, they need to decide the building blocks they are going to use: active, passive, smart beta or alternatives. The effectiveness of specific passive products should then be assessed in the overall context of the portfolio’s targets and risk budgets. Investors also need to scrutinise the role that specific instruments are likely to play within the overall investment portfolio.

When selecting the product, investors must analyse the market exposure they are trying to achieve, the product’s structure and performance, and the total cost of ownership, which involves looking beyond the headline fees. Costs of passive strategies, especially in illiquid asset classes, can add up and not all indices lend themselves to efficient, accurate replication.

Picking the right passive strategy - and vehicle - requires good understanding and attention on the part of the investor to make sure the product delivers what it promises - and that there are no surprises. The point of passive investment is that it should be straightforward and should match investors’ expectations of risk and returns. That can only happen if a passive investor takes an active interest before handing their cash over.

(1) EPFR, January 2018

What question should we tackle next?

Email your suggestion toeditorial@fil.com

The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future results.

These materials are provided for information purposes only and are intended only for the person or entity to which it is sent.

These materials do not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities or investment product. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.

Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. They are valid only as of the date indicated and are subject to change without notice.

This material was created by Fidelity International. It must not be reproduced or circulated to any other party without prior permission of Fidelity.

This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.

This content may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.

Fidelity International refers to the group of companies which form the global investment management organisation that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice personal recommendations based on individual circumstances.

Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG, authorised and supervised by the Swiss Financial Market Supervisory Authority FINMA. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German institutional clients issued by FIL Investments International – Niederlassung Frankfurt.

In Hong Kong, this content is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road., Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C. Customer Service Number: 0800-00-9911#2

IC18-93