A sound investment process and strong management team underpin Fidelity Small-Mid Multifactor ETF'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 a significant overweight position in yield exposure and an underweight in volatility exposure compared with category peers. High yield exposure is attributed to holding high dividend-paying or buyback stocks, and is suitable for income seekers outside of fixed-income. And low volatility exposure is rooted in stocks that have a lower standard deviation of returns. 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

EMCOR Group

Viking Therapeutics

Pure Storage

XPO Logistics

Dick's Sporting Goods

Interactive Brokers

TechnipFMC

Ritchie Bros. Auctioneers

Reinsurance Group of America

Toll Brothers

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 Small-Mid Multifactor ETF earns a High Process Pillar rating. 

The most meaningful contributor to the rating is that this fund tracks an index. Historical data, like Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. The parent firm's five-year risk-adjusted success ratio of 64% also 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 compelling success ratio suggests that the firm does well for investors and that this fund may benefit from that. Strong risk-adjusted performance also supports the rating, as shown by 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.

 This strategy targets deeper value plays than its peers’ average in the Small Blend Morningstar Category. But in terms of market capitalization, it is on par with peers. Analyzing additional factors, the managers have consistently overweighted yield-paying companies compared with Morningstar Category peers in recent years, shown by the portfolio's high exposure to stocks paying dividends or buying back shares. High-yield stocks tend to be connected to more mature companies earning enough cash to return some to shareholders. At times, however, extreme market pressure can force them to cut their dividends, which hurts stock performance. In recent months, the strategy was more exposed to the Yield factor compared with its Morningstar Category peers as well. This strategy has also exhibited a tilt toward low-volatility stocks in recent years, meaning companies with a lower historical standard deviation of returns. These low-risk stocks are typically at their best when markets are not. Low volatility exposure contributes to limited loss on the downside at the cost of a lag in bull markets. Similarly, in recent months, the strategy also had less exposure to the Volatility factor than peers. Additionally, the strategy has constantly maintained a defensive tilt, with exposure to high-quality stocks. This means the fund holds consistently profitable, growing companies with solid balance sheets that may help it endure downturns better than Morningstar Category peers. 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 has allocations in its top two sectors, consumer cyclical and healthcare, that are similar to the category. The sectors with low exposure compared to category peers are technology and industrials; however, the allocations are similar to the category. The portfolio is positioned across 602 holdings and its assets are more dispersed than peers in the category. In particular, 3.4% of the fund’s assets are concentrated in the top 10 fund holdings, as opposed to the typical peer's 23.9%. And in closing, in terms of portfolio turnover, on a year-over-year basis, 65% of the fund's holdings have changed, whether through increasing, decreasing, or changing a position.

High

Process

Fidelity Small-Mid Multifactor ETF's strong team drives the strategy's Above Average People Pillar rating. There’s a deep 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, demonstrating their 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 Small-Mid Factor ETF

FSMD tracks a multi-factored index of US companies.

The Fidelity Small-Mid Multifactor ETF is a strategic beta ETF that focuses on investing in small- and mid-cap U.S. companies. FSMD has outperformed passive SMID-cap indices over the last three years by focusing on factors like valuation, quality, momentum, and low volatility. The fund's highly diversified nature and exposure to regional banks pose risks that could limit its potential for outperformance.

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