NYSE Active ETF Updates

Q&A with Harbor Capital Advisors

This week we sit down with Steve Cook at Harbor Capital Advisors to discuss the company’s entry into the active ETF market.

Harbor Capital Advisors has offered investors access to a boutique set of active managers for over 35 years. The firm entered the active ETF market in the fall 2021 with the launch of NYSE Arca-listed SIFI & SIHY. Since then, the line-up has grown to include 14 ETFs across asset classes. What led to the decision to enter the active ETF market and what is on the horizon for Harbor?

Harbor has a long history of manager research, uncovering boutique asset managers across the globe with a great investment process that delivers alpha to investors, and then packaging those strategies in a registered fund that retail investors can benefit from. What was once a one-size-fits-all process using mutual funds, the industry and investor preferences have evolved, where the retirement channel now often prefers the CIT structure for its cost efficiency, and the wealth channel has shown a preference for ETFs given their reduced cost, tax efficiency, liquidity and transparency. As such, Harbor wants to meet investors and advisors where they are, so we strive to be vehicle agnostic and offer mutual funds, CITs and ETFs to give our clients the choice of what best meets their needs. Over the last decade, advisors and investors have shown a preference for ETFs, and Harbor has launched, and will continue to launch, active ETF products to meet that demand.

As a global asset manager what benefits and/or nuances come with operating an active ETF product line-up compared to other investment wrappers (i.e., mutual funds, CITs, etc.)?

There are several benefits and nuances to operating an active ETF platform for an asset manager. The primary benefit is offering your clients choice of structure. Many advisors and investors have shown a preference for ETFs due to the advantages they bring, including cost, transparency, liquidity, and tax efficiency. At Harbor, we focus on offering investment strategies from world class managers that will deliver elevated returns to investors across asset classes. By offering ETFs we can focus on this core capability while also benefiting from the advantages that come from the ETF wrapper. With those advantages comes the responsibility of supporting those advisors and investors throughout the ETF lifecycle, including educating them on the capital markets and execution to allow smooth entry and exit with our ETFs. We work with the liquidity community to support liquidity, understanding platform needs surrounding ETFs and working with platform block desks to support advisors, along with the daily operations to support in-kind creation and redemption.

Harbor recently completed its third conversion of a legacy fund into an ETF with the transition of a private fund to newly NYSE Arca-listed LSEQ. What benefits do conversions provide both asset managers and end investors?

When we look at conversions, generally we are looking at a product that has delivered strong investment performance over an extended period, but for whatever reason has failed to attract investor flows. Usually this is due to lack of investor awareness, either because investors have just not found the fund due to the sheer volume of product available or have not had access to them. When converting the fund, if done within specific parameters, you can bring the track record with conversion. This benefits both the manager and the investor, as the manager can immediately show that they have the research and investment acumen to drive returns over an entire market cycle and investors can see results that are real and not based on hypothetical back tests. This makes it easier to invest in early-stage ETFs as there are tangible results that can be reviewed when making the decision to include a fund in an investor’s portfolio.

Conversions also benefit from bringing over an investor base that already believes in the strategy, thus allowing a manager to launch the fund without the need for seed money and providing for immediate volume and liquidity in the ETF.

What are the key considerations that investors should contemplate when considering actively managed ETFs?

As with any investment, first and foremost is understanding the strategy and how the portfolio manager intends to deliver alpha over a long period of time into the client’s investments. This is one area where portfolio transparency adds value, as the advisor can look at how a fund’s actual holdings add value and compliment other strategies within a client portfolio.

The next step is the practical side: how do investors manage the capital markets side of an ETF investment and what support is the issuing firm providing to assist investors in this effort. Harbor provides deep capital markets expertise and assistance to our investors, working directly with advisors when needed to help put them in touch with desks and trading firms that can provide quality execution. We also continually speak with advisors about best practices regarding ETF execution, offering insights like avoiding the first and last 15 minutes of trading, if possible, to allow time for price discovery and using limit orders on trades to ensure optimal execution in the market.

One additional step Harbor has taken to provide investors with a better execution experience is listing some of our ETFs on the NYSE’s trading floor. There are a few reasons advisors and investors sometimes want to execute an ETF trade within the first and last 15 minutes of trading. As an ETF issuer, we need to find ways to allow investors to do that while still providing quality execution and a great investor experience. Listing our ETFs directly on the NYSE floor and putting a person in charge of that opening and closing process has given Harbor’s clients the ability to get quality market entry and exits during times of the trading day that have traditionally been a challenge.

Finding an ETF issuer that provides support across the lifecycle of an ETF, from research and product creation all the way through the execution and ease of ownership, should be at the top of the list for investors when considering an asset manager in the ETF space.

Lastly, what guidance would you provide sponsors as they consider expanding their product lineup to include actively managed ETFs?

In evaluating an entry into the ETF space, an asset manager that has traditionally launched ETFs has a number of key items to consider:

While many firms read articles about the explosive growth in ETFs and see the products as a quick fix for fighting outflows, success should be measured in years not months, launching and raising assets in ETFs is not easy. Platform requirements for ETFs are different and require a deep understanding of the marketplace and sometimes are overlooked by new issuers.

Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives, risks, charges, and expenses.

Contact Fidelity for a prospectus, an offering circular, or, if available, a summary prospectus containing this information. Read it carefully.

*This ETF is different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. This ETF will not. This may create additional risks for your investment. For example: You may have to pay more money to trade the ETF’s shares. This ETF will provide less information to traders, who tend to charge more for trades when they have less information. The price you pay to buy ETF shares on an exchange may not match the value of the ETF’s portfolio. The same is true when you sell shares. These price differences may be greater for this ETF compared to other ETFs because it provides less information to traders. These additional risks may be even greater in bad or uncertain market conditions. The ETF will publish on its website each day a “Tracking Basket” designed to help trading in shares of the ETF. While the Tracking Basket includes some of the ETF’s holdings, it is not the ETF’s actual portfolio. The differences between this ETF and other ETFs may also have advantages. By keeping certain information about the ETF secret, this ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF’s performance. If other traders are able to copy or predict the ETF’s investment strategy, however, this may hurt the ETF’s performance. For additional information regarding the unique attributes and risks of the ETF, see section below. Additional Active ETF Disclosure: The objective of the actively managed ETF Tracking Basket is to construct a portfolio of stocks and representative index ETFs that tracks the daily performance of an actively managed ETF without exposing current holdings, trading activities, or internal equity research. The Tracking Basket is designed to conceal any nonpublic information about the underlying portfolio and only uses the Fund’s latest publicly disclosed holdings, representative ETFs, and the publicly known daily performance in its construction. You can gain access to the Tracking Basket and the Tracking Basket Weight overlap on Fidelity.com or i.Fidelity.com. Although the Tracking Basket is intended to provide investors with enough information to allow for an effective arbitrage mechanism that will keep the market price of the Fund at or close to the underlying NAV per share of the Fund, there is a risk (which may increase during periods of market disruption or volatility) that market prices will vary significantly from the underlying NAV of the Fund; ETFs trading on the basis of a published Tracking Basket may trade at a wider bid/ask spread than ETFs that publish their portfolios on a daily basis, especially during periods of market disruption or volatility, and, therefore, may cost investors more to trade, and although the Fund seeks to benefit from keeping its portfolio information secret, market participants may attempt to use the Tracking Basket to identify a Fund’s trading strategy, which, if successful, could result in such market participants engaging in certain predatory trading practices that may have the potential to harm the Fund and its shareholders. Because shares are traded in the secondary market, a broker may charge a commission to execute a transaction in shares, and an investor may incur the cost of the spread between the price at which a dealer will buy shares and the price at which a dealer will sell shares. For more information on each fund, please visit the individual product pages. The NYSE and Fidelity Investments are independent entities and are not legally affiliated. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917 1097457.1.0