A sound investment process and strong management team underpin Fidelity Dividend ETF for Rising Rates's Morningstar Medalist Rating of Gold. The portfolio maintains a sizable cost advantage over competitors, priced within the lowest fee quintile among peers.  

 The strategy's sensible investment philosophy merits a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight in yield exposure and liquidity exposure compared with category peers. High yield exposure is attributed to holding more stocks with high dividend or buyback yields. And a high liquidity exposure is rooted in stocks with higher trading volumes, lending managers more flexibility. The strategy’s management team earns an Above 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

Microsoft

Apple

NVIDIA

Broadcom

Eli Lilly

JPMorgan Chase & Co

UnitedHealth Group

Visa

Dell Technologies

Johnson & Johnson

Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category benchmark on a risk-adjusted basis over the long term. Fidelity Dividend ETF for Rising Rates earns a High Process Pillar rating. 

The most substantial contributor to the rating is that this fund tracks an index. Historical data, such as Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. Noteworthy risk-adjusted performance also influences the rating. This can be seen in the fund's five-year alpha calculated relative to the category index, which suggests that the managers have shown skill in their allocation of risk. The parent firm's five-year risk-adjusted success ratio of 64% strengthens the process. 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. Their commendable success ratio suggests that this firm does well for investors and that this fund may benefit from that.

 This strategy prefers larger market-cap firms compared with the average fund in its peer group, the Large Value Morningstar Category. But in terms of investment style, it is on par with peers. Analyzing additional factors, this strategy has continually had more high-yield exposure than the Morningstar Category average during recent years, with the portfolio holding more stocks with high dividend or buyback yields. Stocks with high yields can be more stable, mature companies, but at times extreme market pressure or fundamental deterioration may prompt them to cut their dividends, which tends to hurt stock performance. Different from its historical appetite, however, the strategy was less exposed to the Yield factor compared with Morningstar Category peers in the most recent month. Given the high trading volume of holdings, this strategy has been exposed to liquid assets during these years. More-liquid assets contribute to more-flexible exit strategies without price changes and tend to be a ballast during market selloffs. For example, if the portfolio faces successive redemptions in a short period of time, it will be less likely to experience a significant loss. Compared with category peers, however, the strategy had less Liquidity factor exposure in the latest month. During the last few years, this strategy has also tilted in favor of high-quality stocks, those that have demonstrated low financial leverage and solid return on equity. Though it may trail peers during an economic boom, this orientation contributes to helping it weather periods of economic stress better. In this month, the strategy also had more exposure to the Quality 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 technology and consumer cyclical relative to the category average by 17.2 and 4.2 percentage points, respectively. The sectors with low exposure compared to category peers are financial services and energy, underweight the average by 6.5 and 4.2 percentage points of assets, respectively. The strategy owns 128 securities and is quite concentrated. More concretely, 32.6% of the portfolio's assets are housed within the top 10 holdings, as opposed to the typical peer's 27.4%. And in closing, in terms of portfolio turnover, on a year-over-year basis, 29% of the fund's holdings have changed, whether through increasing, decreasing, or changing a position.

High

Process

Fidelity Dividend ETF for Rising Rates's strong team drives the strategy's Above Average People Pillar rating. There’s a sizable bench of five managers listed on the fund. Experience on the team is abundant, with 11 years of average portfolio management experience. Together, they manage a total of 60 strategies, with a Gold asset-weighted average Morningstar Medalist Rating, indicating the potential to deliver positive alpha relative to the category median in aggregate.  

 Note: This People Pillar rating is indirectly assigned by an analyst. Morningstar analysts evaluate the People Pillar for passive products at the brand level and may also differentiate by asset class. There is at least one other passive strategy at the firm that is covered by a Morningstar analyst, so the People Pillar rating of the fund is inherited from the rating that the Morningstar analyst assigned to investment vehicles under the same brand name.

Above 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 Dividend ETF for Rising Rates

FDRR tracks an index of large- and mid-cap companies in developed nations that exhibit strong dividend characteristics and have a positive correlation to increasing 10-year US Treasury yields.

Fidelity Dividend ETF for Rising Rates invests in companies expected to perform well in a rising interest rate environment. The fund has underperformed historically raising questions about the effectiveness of its strategy with an outlook for rates to decline going forward. We recommend investors to avoid FDRR while considering alternative dividend ETFs.

FDRR: Strategy Concerns As Interest Rates Decline

Fidelity® Dividend ETF for Rising Rates holds dividend stocks showing a positive correlation to 10-year U.S. Treasury yields. The portfolio has better value and quality metrics than the benchmark. The FDRR ETF has lagged the S&P 500 and two popular quality dividend ETFs.

FDRR: Attractive Value And Quality, Yet Lagging In Rising Rates

FDRR is an investment vehicle mindful of macro, utilizing an equity strategy calibrated to benefit from tighter monetary policy in the U.S. Past performance revealed flaws in the strategy. A case for monetary policy to remain contractionary still could be constructed, but as FDRR's past performance illustrated, this is hardly enough for its holdings to appreciate meaningfully.

FDRR: This Dividend Strategy Looks Good On Paper

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Dividend Investing: Broader Is Better For Multi-Asset Strategies

FDRR tracks the Fidelity Dividend Index For Rising Rates, a potentially misleading title considering how poor it performed last year. My analysis traced the performance to FDRR's sector-neutral strategy and a methodology that places minimal importance on a security's correlation with long-term U.S. Treasury yields.

FDRR: 3% Dividend Yield, But Little Protection Against Rising Rates

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U.S. treasury yields jumped following the release of upbeat U.S. economic data points.

Rising Rates ETFs to Tap on Upbeat Economic Data

Fidelity Dividend ETF for Rising Rates ETF invests in dividend stocks that should profit from rising rates. It is better than the S&P 500 regarding valuation and quality metrics.

FDRR: Designed For Inflation And Still Unconvincing

The Fidelity Dividend ETF for Rising Rates claims to select stocks that can provide protection during a rising rate environment. However, the selection criteria is based on historical correlations between stock performance and treasury yields and is only given a 10% composite score weight.

FDRR: Complex Index Methodology And Poor Historical Performance

FDRR holds dividend-paying North American stocks with a positive correlation to 10-Year U.S. Treasury Yields. Fund expenses are 0.29%, and the ETF has $586 million in AUM. FDRR has outperformed SPY by about 3% YTD, and tends to be less volatile than the broader market. Top holdings include Apple, Microsoft, and Johnson & Johnson.

FDRR: A Dividend ETF Built For Rising Rates, But Should You Buy?

FDRR tracks the Fidelity Dividend Index for Rising Rates, which is supposed to represent the performance of the developed-world large- and mid-cap companies, including the U.S. FDRR's portfolio has changed since my note from July 2021. The article delves into its current iteration, paying due attention to factors.

FDRR: Not Appealing Right Now Despite Hawks Prevailing

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FDRR: Dividends For Rising Rates

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Overseeing around $475 million in AUM, FDRR is moderately priced, with its expense ratio of 0.29% being lower than the U.S. Equities asset class median of 0.38%. The fund offers a distribution yield marginally north of 2%, which is above the yield of SPY, but the drawback is its poor historical dividend growth.

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