
Investors’ search for financially healthy companies with strong balance sheets might bring them to value and quality factor ETFs.
As investors consider factor ETFs such as the Fidelity Value Factor ETF (FVAL ) and the Fidelity Quality Factor ETF (FQAL ), it’s important to fully understand the differences between the two strategies.
FQAL, which has $1.1 billion in assets under management, is based on the Fidelity U.S. Quality Factor Index. The index seeks to reflect the performance of large and mid-cap U.S. companies of higher quality than the broader market.
FVAL, with $980 million in assets, is based on the Fidelity U.S. Value Factor Index, which seeks to reflect the performance of stocks of large and mid-cap U.S. companies with attractive valuations.
The indexes underpinning both factor ETFs begin by selecting the largest 1,000 U.S. stocks based on market cap and certain liquidity and investability requirements. The liquidity and investability screens exclude stocks in the bottom quintile of securities based on days to trade $10 million. Additionally, all stocks with less than 15% free float market cap are excluded.
At first glance, FVAL and FQAL may look similar. Both funds primarily comprise large-cap stocks and have information technology as the top sector by weight. Furthermore, the top names in both funds are Nvidia (NVDA), Apple (AAPL), and Microsoft (MSFT) as of November 30.
However, looking under the hood uncovers the differences between FVAL and FQAL as the portfolios overlap by weight by 35.2%, as of 1/13/25, according to ETF Research Center.
Fidelity’s Quality Factor ETF
FQAL’s underlying index calculates a composite score to determine the level of exposure each stock has to the targeted quality factor. The composite score is a weighted average score based on multiple measures of quality.
FQAL invests in stocks with high profitability based on free cash flow margin, high return on invested capital, and free cash flow stability.
Free cash flow margin is a profitability measure that indicates a company’s efficiency at converting sales to cash. This may indicate whether the company has higher earnings quality.
Return on invested capital provides an important measure of profitability relative to the capital invested. This metric captures how much profit a company generates with the assets committed by equity and debtholders, and therefore accounting for leverage.
Finally, free cash flow stability offers a measure of a company’s consistency in generating positive free cash flow.
It’s important to note that the bank industry group’s composite factor score is determined differently. The category’s score is calculated using alternative weighting, which considers return on equity and debt to assets.
Considering Value When Looking at Factor ETFs
Fidelity’s value factor strategy also uses composite scores to determine each stock’s exposure to the value factor.
The fund targets attractively valued companies based on free cash flow yield, EBITDA to enterprise value, tangible book value to price, and earnings over the next twelve months to price.
Free cash flow yield is calculated as free cash flow per share divided by the share price.
EBITDA to enterprise value is straightforward. This looks at earnings before interest, tax, depreciation, and amortization divided by enterprise value.
Tangible book value to price measures a company’s total book value minus any intangible assets per share over share price.
Finally, earnings over the next twelve months are based on consensus estimates of earnings per share over the share price.
Like FQAL, the bank industry group’s composite factor score is determined using alternative weighting. In FVAL, this considers tangible book value to price and earnings over the next twelve months to price.
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Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
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