While some debate the merits of active versus passive investment, advisors and investors no longer have to choose one over the other. The Fidelity Enhanced ETFs offer the best of both worlds by providing exposures similar to core equity benchmarks but with the benefits of active management.
“Fidelity Enhanced ETFs are low-cost, actively managed equity strategies that stick closely to their benchmark,” Fidelity wrote in a paper. “Through disciplined active positioning to a subset of the index’s positions, the ETFs strive to generate better-than-passive performance while maintaining a core equity exposure.”
The Enhanced ETF suite from Fidelity combines a disciplined approach to portfolio construction with systematic security selection. Using a proprietary model that is both research-driven and systematic in its stock selection, the strategy scores individual companies.
Companies are rated using a multi-factor approach to identify long-term stock return drivers. These include growth, profitability, valuation, and nontraditional characteristics found beyond financial statements. “By incorporating diverse factors into the model, the Enhanced ETFs seek to provide greater consistency and higher likelihood for outperformance over varying market environments while aiming to reduce the potential for cyclical underperformance,” explained Fidelity.
Layering in Risk Management
The Enhanced ETF suite goes a step further in including a proprietary risk model. This model is specific to each fund and its investment universe. It enables better control of exposure to the factors and seeks to remain aligned with defining aspects of the benchmark. The strategy seeks to retain a similar profile to the benchmark regarding sector, industry, and region constraints. Additionally, it attempts to align in size, securities included, and beta.
Active management benefits the way the Enhanced ETF suite handles risk. “As an additional layer of risk management, the investment team provides daily oversight of the investment process and may identify risks driven by unique or impactful events,” the firm noted. Such events often prove difficult to predict with models. Fidelity referenced the 2021 meme stock rally as an example and the investment team’s response in managing the portfolio when price movement occurred due to factors that weren’t long-term drivers and, therefore, difficult to evaluate from a systematic framework.
Collectively, the Enhanced ETF suite’s strategy seeks to offer outperformance over the benchmark while retaining core equity exposure characteristics. The strategies have existed for nearly two decades, first as mutual funds launched in 2007 and then they were later converted to active ETFs in 2023. While actively managed, these ETFs offer a low price point entry to a strategy built to weather various market environments.
Combining Equity Benchmark Exposures And Active Management
Fidelity currently offers six different strategies within its Enhanced ETF suite that span core equity exposures. 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) offer various exposures to large-cap stocks. FELC seeks to offer higher total returns than the broad S&P 500 Index.
For investors seeking a value or growth tilt within their large-cap allocations, FELV and FELG offer two different options. FELV seeks better returns than the Russell 1000 Value Index, and FELG seeks to outperform the Russell 1000 Growth Index. All three large cap ETFs carry an expense ratio of 0.18%.
The Fidelity Enhanced Mid Cap ETF (FMDE) offers exposure to midcap stocks. The fund seeks higher total returns than the Russell Midcap Index and has an expense ratio of 0.23%. The Fidelity Enhanced Small Cap ETF (FESM) offers exposure to small caps and seeks to outperform the Russell 2000 Index. The fund’s expense ratio is 0.28%.
The Fidelity Enhanced International ETF (FENI) seeks to provide returns above the MSCI EAFE Index. It does so by investing in developed international stocks while excluding the U.S. and Canada. FENI carries an expense ratio of 0.28%.
For more news, information, and strategy, 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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