Fidelity Disruptors ETF’s management team is rated Average, but a solid investment process still helps this strategy retain its Morningstar Medalist Rating of Bronze. The portfolio maintains a sizable cost advantage over competitors, priced within the least expensive fee quintile among peers.  

 The strategy's effective investment philosophy supports an Above Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight in liquidity exposure and an underweight in quality exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And a low quality exposure is rooted in stocks with higher financial leverage and lower profitability. The strategy’s management team earns an Average People Pillar rating. The strategy's parent organization earns the firm an Above Average Parent Pillar rating. People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

Analyst Rating

Fidelity Covington Trust - Fidelity Disruptive Communications ETF

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Fidelity Covington Trust - Fidelity Disruptive Automation ETF

Fidelity Covington Trust - Fidelity Disruptive Medicine ETF

Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category index on a risk-adjusted basis over the long term. Fidelity Disruptors ETF earns an Above Average Process Pillar rating. 

The most significant contributor to the rating is the parent firm's five-year risk-adjusted success ratio of 65%. The measure indicates the percentage of a firm's funds that survived and beat their respective category's median Morningstar Risk-Adjusted Return for the period. The parent firm's impressive risk-adjusted performance, as shown by its average 10-year Morningstar Rating of 3.3 stars, also bolsters the rating. Lastly, the process is limited by the parent firm's five-year retention rate of 72%, which suggests it could do more to retain its portfolio managers.

 This strategy prefers smaller market-cap firms compared with the average fund in its peer group, the Large Growth Morningstar Category.  But in terms of style (value/growth) exposure, it is similar. Looking at additional factor exposure, the fund has held stocks with higher trading volumes compared to Morningstar Category Peers in the past few years. Such stocks may have less potential upside than illiquid holdings, but they are easier to trade during market downturns. In recent months, the strategy was more exposed to the Liquidity factor compared with its Morningstar Category peers as well. The strategy has also had a defensive tilt, demonstrated by lower exposure to the quality factor than peers in recent years. This means the fund has avoided holding companies that are consistently profitable, growing, and have solid balance sheets. Lacking this ballast, the fund's prospects could rest on its ability to beat peers during economic booms. Similarly, in recent months, the strategy also had less exposure to the Quality factor than peers. In addition, this strategy has exhibited a tilt toward higher-volatility stocks in these years, meaning companies that have a higher historical standard deviation of returns compared with peers. Such stocks tend to rise faster and fall harder than the broad market. High-volatility exposure contributes to stronger performance during bull markets, but often at the cost of losing more during downturns. In this month, the strategy also had more exposure to the Volatility factor over its peers. More information on a fund and its respective category's factor exposure can be found in the Factor Profile module within the Portfolio section. 

 The portfolio is overweight in healthcare and financial services relative to the category average by 6.2 and 5.2 percentage points, respectively. The sectors with low exposure compared to category peers are consumer cyclical and consumer defensive, underweight the average by 8.2 and 2.9 percentage points of assets, respectively. The strategy has only reported a handful of holdings, and is in a category where the typical fund has approximately 53.2% of assets concentrated in the top 10 holdings.

Above Average

Process

Fidelity Disruptors ETF earns an Average People Pillar rating. Charles W Hebard, the longest-tenured manager on the strategy, provides strong guidance, bringing forward 23 years of listed portfolio management experience. The average Morningstar Rating of the strategies they currently manage is 1.5 stars, indicating that their risk-adjusted returns have underperformed the category average. The team is composed of a solid supporting cast of five additional named managers, averaging 11 years of listed portfolio management experience. As a team, they manage seven investment vehicles together, with solid long-term prospects. The strategies average a Bronze asset-weighted Morningstar Medalist Rating, indicating a position to deliver positive alpha in aggregate. Portfolio managers have made only a small personal investment in the fund, with the maximum investment by any one manager being between $50,000 and $100,000. That isn't close to being enough to align their interests with those of the strategy's investors. The team has seen more turnover than its peers, which could hinder its effectiveness. The most recent documented departure was one month ago.

 Note: The People Pillar rating is indirectly assigned by an analyst. The longest-tenured manager of the fund also manages a different product rated by an analyst. Their analyst-assigned People Pillar rating is combined here with the People scores (algorithmic or analyst-assigned) for the fund’s other managers on a tenure-weighted basis.

Average

People

Fidelity earns an Above Average Parent rating because of its ability to stay ahead of its competition.

The firm's successful stock-picking mutual funds fueled its rise to prominence, and it has adapted well to investor preferences that have shifted markedly over the past two decades. Index funds and exchange-traded funds have garnered most of the industry's flows as money has gushed from actively managed products—Fidelity's included. Yet overall, the asset-management division has continued to achieve positive organic growth by introducing or maintaining aggressive pricing on its own suite of passively managed funds and expanding its menu of client-demanded investment structures, such as managed accounts and collective investment trusts. These moves are made possible by the firm's strong distribution network, scale, established brand, and willingness to tolerate losses on some products in pursuit of broader strategic objectives.

The firm is not without blemishes. It could stand to rationalize its lineup of active equity funds and do better to maintain continuity in an equity fund's portfolio construction as the fund's leadership inevitably changes.

Overall, the firm has served its funds' investors well. It boasts a topnotch fixed-income division and remains home to some of the industry's most talented equity managers and a strong team supporting its well-run target-date series.

Parent

Fidelity Disruptors ETF

FDIF is an actively managed fund-of-funds that holds a suite of global Fidelity ETFs, all of which are tied with disruptive technologies in automation, communications, finance, medicine, and technology.

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It was a busy week for ETF launches and closures. A total of 15 ETFs launched during the week shortened by the Juneteenth holiday, defying the typically slow launch count for weeks surrounding three-day weekends.

Last Week in ETFs: 15 Launches, Closures Continue Rapid Pace

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In the latest big news for the burgeoning ETF landscape, Fidelity will convert six mutual funds to ETFs. The firm's suite will see its thematic ETFs investing roster expand and diversify significantly.

Fidelity Converts Six Funds to Thematic ETFs

The timeline for the conversion of six thematic equity mutual funds from Fidelity focused on different facets of the disruptive innovation theme into ETFs is taking shape. The latest filing by the issuer outlines the details of the funds and their conversion dates.

Fidelity Thematic Funds to Convert Within 2 Weeks

News for Fidelity Disruptors ETF ETF (FDIF)