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Flows shifting toward 'defensive' sectors, says Fidelity exec

managed mutual funds andexchange-traded funds have taken share from actively managed products over thelast several years.

But, through sectorfunds, Fidelity Research & Management has experienced growth with bothtypes of offerings. Fidelity's sector-focused mutual funds include FidelitySelect Biotechnology Portfolio (FBIOX) and Fidelity Select Energy Portfolio(FSENX). The newer ETFs, which trade commission-free on Fidelity's brokerageplatform, include Fidelity MSCI Health Care Index ETF (FHLC) and Fidelity MSCIEnergy Index ETF (FENY).

Todd Rosenbluth, directorof ETF and mutual fund research at S&P Global Market Intelligence, sat downwith Tony Rochte, president of Fidelity SelectCo, which manages more than $80billion in sector mutual funds and ETFs. Rochte spoke about why Fidelitylaunched sector ETFs, discussed how they are positioned alongside sector mutualfunds, highlighted where the assets have been going, and noted the addition ofa real estate offering ahead of the pending global industry classificationstandard sector changes.

The following is anedited transcript of that conversation.

S&P Global MarketIntelligence: Fidelity has decades-long experience with sector investingthrough mutual funds. Why in 2013 did the firm launch sector ETFs?

Tony Rochte: Ifyou go back a year from that to 2012, we created a division inside FidelityAsset Management called SelectCo. The division was focused on sector-basedinvesting in various formats. At the time we had 44 actively managed mutualfunds with approximately $43 billion in assets. We pioneered sector mutual fundinvesting more than 30 years ago. For individual investors and financialadvisers it was clear to us that there was continued appetite for sectorproducts but also a desire to express a view in a more tactical fashion. Forthat reason, we launched a suite of initially 10 GICS-based sector ETFs. Thereare now 11 with the addition of real estate, and these complement the activemutual funds.

Is there a preferencefor passive over active or vice versa?

We're indifferent as long as we can provide a great investorexperience. There are customers that want active management and we have seencontinued growth for our sector mutual funds. And there are others that wantETF products.

What has been thebiggest surprise to you since the ETFs launched?

In just over two years, we have raised just over $2.8billion in assets for our ETFs. They trade extremely well and the spreads havebeen tight. We have one of the lowest-cost families of sector-based productswith expense ratios of 12 basis points. However, we have grown also our sectormutual fund business to $82 billion over the last four years. So investors havelooked to us for both passive and active strategies.

Health care was a popularplace to invest in 2015, with your sector ETF and your biotech mutual fund bothpulling in strong inflows. Where have the assets flowed in early 2016?

There's no question that health care at the end of 2015 wasalmost 25% of the sector category for us, including the actively managed funds.One thing we know about sectors is that we tend to see changes in sectorleadership. We have certainly seen a shift, particularly in January andFebruary, from more consumer discretionary and health care-oriented exposuresinto more defensive ones such as consumer staples and utilities. In addition,energy has been an interesting space.

You mentioned earlierthe more recent addition of a real estate ETF. It is being added as its ownGICS sector later in 2016. What do you think is the appeal of ?

While it has not been a GICS sector, REITs have been adoptedby investors as separate. We have seen solid demand for our new ETF and weexpect interest to continue. REITs are differentiated because they not onlyoffer income but also capital appreciation depending on where we are in theeconomic cycle.

What's ahead forFidelity SelectCo in 2016?

This year we are working to educate investors about how touse these types of exposures to augment their well-diversified portfolios. Whenwe look at the $713 billion in sector investing at the end of 2015, 42% of itis in ETFs with the remainder in active and passive mutual funds. Our role isto provide the building blocks for investors and thought leadership aboutsectors. We work with our asset allocation team to help clients understandwhere we are in the economic and how sector strategies can fit their needs.