Focusing on fundamentals can be a game changer in a variety of industries. In sports, being able to dribble or catch pop-flies well can mean the difference between winning and losing. In investing, fundamentals drive returns. For active managers who can exploit stock or bond factors, market-beating returns can be had.
So, it’s no wonder why asset manager Fidelity has chosen to launch a new fundamental equity suite.
Already a leader in active management—both in mutual funds and ETFs—Fidelity’s new suite expands its capabilities in fundamental management. The hope for investors is that these new funds will generate better returns. Based on historical evidence, they should.
Factors & Fundamentals
When it comes to evaluating a stock, you have basically two camps. Technical analysis looks at patterns and charting to find trades/investments. The other camp is more familiar to most investors: fundamental analysis.
Here, investors look at various attributes or factors to generate higher returns or mitigate risk. Those attributes are all fodder of Finance 101 and can include points like price-to-earnings or price-to-sales ratios, dividend yields, return on equity, cash flows, quick ratios, or even momentum. Investors use this data to group and compare equities. They then use those comparisons to make buy or sell decisions.
Fundamental analysis has existed since the beginning of the modern market with many leading investors using it to generate above-average returns. Warren Buffett comes to mind as one example. More modern fundamental analysis involves building models based on these factors to drive investment decisions. Firms like AQR, Research Affiliates, and Dimensional have built very successful asset management programs based on quantitative or ‘quant’ analysis.
For many active managers, fundamental analysis forms the basis of their portfolios.
Fidelity Makes the Move
Asset manager Fidelity is a behemoth in the sector, with nearly $5 trillion in assets under management. In total, Fidelity has about $12.6 trillion in assets including those under retirement plans. A huge portion of that includes some very successful active mutual funds. In recent years, the firm has also become a major player in the world of ETFs. This has included both passive and active funds. Thanks to mutual-fund-to-ETF conversions, copycat launches, and original fund ideas, the firm’s ETF suite has continued to grow and now rivals existing players in the industry.
Its latest series of launches is a shot-across-the-bow in terms of fundamental and quantitative analysis.
Fidelity has launched a new fundamental suite of ETFs, both converting mandates on a few struggling funds as well as launching a new ETF. The Fidelity Growth Opportunities ETF (FGRO), Fidelity New Millennium ETF (FMIL), and Fidelity Small-Mid Cap Opportunities ETF (FSMO) will be tweaked and given new tickers. These funds will become the Fidelity Fundamental Large Cap Growth ETF (FFLG), Fidelity Fundamental Large Cap Core ETF (FFLC), and the Fidelity Fundamental Small-Mid Cap ETF (FFSM), respectively. Fidelity also launched the Fidelity Fundamental Large Cap Value ETF (FFLV) back in February 2024.
The new suite of ETFs will employ a proprietary investment process to outperform their benchmarks. Managers will use factors such as financial condition, earnings outlook, strategy, management, industry position, and economic and market conditions to build a portfolio. The twist is that the new ETFs will also use a quantitative portfolio construction process. Managers have designed a rules-based model that various fundamentals get fed into to make the underlying security selection.
The overall idea is that these funds buy the best of the best and stick to their underlying mandates.
In addition, the reformatted ETFs and new launch will see lower expense ratios. The three large-cap funds will see expense ratios of just 0.38%, down from 0.59%. The small/mid-cap fund will see a 0.43% expense ratio, down from 0.60%.
These new active fundamental launches follow last year’s conversion of several passive fundamental index mutual funds into fundamental index or smart-beta ETFs. Those ETFs have quickly gathered billions in assets.
A Strong Potential for Outperformance
The win for investors of Fidelity’s new suite comes down to market-beating outperformance. Active management performs well in the ETF structure as the lower fee hurdles, cash drag, and lower tax benefits of the structure can enhance returns for portfolios.
There are plenty of examples of this, particularly in copycat ETFs of existing mutual funds. Successful ETF launches from T. Rowe Price and PIMCO using the same strategy and managers of existing funds have provided extra returns versus their mutual fund sisters.
While Fidelity doesn’t have exact copycat mutual funds of these ETFs, it does have various fundamental and quantitative active mutual funds in its line-up. Several of these funds, such as its Stock Selector suite, have managed to outperform their respective benchmarks consistently. For example, the Fidelity Stock Selector Small Cap Fund has managed to add more than two full basis points in annual return versus the Russell 2000 over the last 10 years.
For investors, the new suite of active fundamental ETFs could do the same. The benefits of using an ETF for active management could provide extra ‘oomph’ to returns, allowing for greater outperformance.
Fidelity suggests using these new ETFs as part of an investor’s core. Pairing them with broader passive ETFs could provide just the right amount of excess return with regard to risk.
Fidelity Active ETFs
These ETFs are the largest in Fidelity’s active line-up. They cover a wide range of asset classes and strategies. They are sorted by their YTD total returns, which range from -2.8% to 7.3%. They have assets under management of $126M to $7.5B and expenses of 0.18% to 0.59%. They are currently yielding between 0% and 6.5%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| FBCG | Fidelity Blue Chip Growth ETF | $1.43B | 7.3% | 0.02% | 0.59% | ETF | Yes |
| FELG | Fidelity Enhanced Large Cap Growth ETF | $2.42B | 6.2% | 0.67% | 0.18% | ETF | Yes |
| FELC | Fidelity Enhanced Large Cap Core ETF | $2.36B | 5.7% | 0.1% | 0.18% | ETF | Yes |
| FELV | Fidelity Enhanced Large Cap Value ETF | $1.93B | 4.5% | 2.46% | 0.18% | ETF | Yes |
| FBCV | Fidelity Blue Chip Value ETF | $126M | 3.2% | 1.7% | 0.59% | ETF | Yes |
| FDTX | Fidelity Disruptive Technology ETF | $144M | 2.8% | 0% | 0.50% | ETF | Yes |
| FDHY | Fidelity High Yield Factor ETF | $301M | 0.03% | 6.46% | 0.45% | ETF | Yes |
| FLTB | Fidelity Limited Term Bond ETF | $151M | -0.2% | 3.4% | 0.25% | ETF | Yes |
| FCOR | Fidelity Corporate Bond ETF | $216M | -2.7% | 3.85% | 0.36% | ETF | Yes |
| FBND | Fidelity Total Bond ETF | $7.5B | -2.8% | 4.47% | 0.36% | ETF | Yes |
In the end, Fidelity’s restructuring and launch of its fundamental suite of new ETFs underscores how active management can deliver better returns for investors. And thanks to the ETGF structure, investors can get the most out of those returns. Based on Fidelity’s previous prowess in active management, these funds should be hits and add plenty of firepower to their ETF line-up.
The Bottom Line
Fidelity’s new launches into active ETFs make a ton of sense for portfolios. By focusing on fundamentals, the new funds should be able to deliver the best of active management. And thanks to the ETF structure, those benefits will be delivered to portfolios.