Many funds exist for equity investors, but few combine the benefits of core exposures alongside active management. The Fidelity Enhanced ETF suite seeks to outperform its benchmarks through its active strategy.
“Systematic security evaluation and disciplined portfolio construction are the foundation of our approach,” Fidelity wrote recently.
The Enhanced ETF suite converted from mutual fund strategies in 2023. The suite relies on a proprietary and systematic model when selecting securities. The strategy utilizes a research-driven approach that includes security-level analysis across multiple factors, including growth, valuation, and quality. It also includes non-traditional inputs from various data sources beyond just financial statements. Combining traditional and non-traditional factors can benefit the ETF’s overall approach. It can also potentially create a fuller picture of a securities return potential. The investment team does not expect all factors to be effective in any given period; rather, the diversification benefit of incorporating multiple views in selecting securities provides an opportunity for fund outperformance across different market environments.
See also: The Potential Benefits of Fidelity’s Enhanced ETF Core Equity Suite
The strategy incorporates its systematic and model-driven views of the most attractive stocks while balancing exposures to remain reflective of the core composition of the targeted benchmark. “In constructing the portfolios, active position constraints are applied not only to individual securities but also across sectors, industries, countries, and other criteria,” explained Fidelity. Meanwhile, “a proprietary risk model is used to measure and manage benchmark deviation.”
This ensures that the portfolios provide exposure similar to their targeted benchmark while seeking to outperform. This risk model is specific to each individual ETF and its investment universe. By tailoring the risk model to each individual ETF, it ensures better factor management and stronger forecasting of benchmark deviation for the actively managed portfolio.
Finally, the team takes a hands-on approach in managing the ETF. They interact with the systematic process and closely monitor the portfolio. For example, if there is a unique or impactful event, the portfolio managers can intervene to make decisions in an effort to avoid unnecessary risk in the portfolio. “These risks can be challenging to predict and model and may require discretionary intervention and risk-motivated decision-making,” Fidelity noted. The fund managers monitor market and security level developments in their daily oversight of the portfolio.
Alpha Opportunities Within Core Equity Allocations
Investors looking for actively managed, large-cap exposure may consider the Fidelity Enhanced Large Cap Core ETF (FELC ), the Fidelity Enhanced Large Cap Value ETF (FELV ), and the Fidelity Enhanced Large Cap Growth ETF (FELG ).
FELC seeks to offer higher total returns than the broad S&P 500 Index. Meanwhile, FELV and FELG seek to outperform the Russell 1000 Value Index and the Russell 1000 Growth Index, respectively. All three funds carry an expense ratio of 0.18%.
For those seeking small and mid cap exposure, the Fidelity Enhanced Mid Cap ETF (FMDE ) and the Fidelity Enhanced Small Cap ETF (FESM ) offer potential opportunities. FMDE seeks better total returns than the Russell Midcap Index, with an expense ratio of 0.23%, while FESM seeks to outperform the Russell 2000 Index, with an expense ratio of 0.28%.
The firm also offers the Fidelity Enhanced International ETF (FENI ), which seeks to generate better returns than the MSCI EAFE Index. It invests internationally, excluding the U.S. and Canada, and has an expense ratio of 0.28%.
For more news, information, and analysis, visit the ETF Investing Channel.
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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