Factor ETFs hit the ETF market over the last decade, offering a way to seek outperformance and/or manage risk better than broader indexes by targeting stocks that display specific traits or characteristics. In an ever-growing ETF ecosystem, factor strategies could potentially play a significant role for investors shifting their portfolios towards ETFs. While investors have many factor ETF options to choose from, Fidelity Investments’ factor funds, like the Fidelity Value Factor ETF (FVAL) and the Fidelity Low Volatility Factor ETF (FDLO), have performed well and merit a look ahead of 2024.
The Basis for Factor ETFs in a Portfolio
Why look to factor ETFs in the first place? In short, factor investing can help enhance portfolio diversification, potentially reduce risk, and potentially outperform relative to the market over the long term. Certain stock characteristics, or “factors,” such as low volatility and value, have emerged from long-term research, and can also play a role in an investor’s overall portfolio.
For example, consider a strategy like the Fidelity Low Volatility Factor ETF (FDLO). FDLO tracks an index of large and mid-cap U.S. stocks with lower volatility than the broader market. Its index, the Fidelity U.S. Low Volatility Factor Index, follows a transparent, rules-based approach to selecting stocks that meet specific criteria. Per VettaFi data, that has led FDLO to tech services, electronic technology, and finance as its top three sectors for holdings.
FDLO has also seen its AUM jump nearly half a billion dollars in just the last month as a result of significant inflows.
Low volatility investing may appeal to those investors concerned, for example, that 2024 may be just as rocky as 2023. In that case, adding an ETF from the low volatility factor category could help to temper equity market gyrations.
FVAL: A Strong Value Candidate Among Factor ETFs
Another view that consistently wins attention among factor ETFs is value investing. Value investors look to firms that the market has priced at a discount, whether due to weak earnings prospects, unclear vision from management, or an overly pessimistic industry outlook.
While value has lagged in the broader market this year (primarily due to lack of exposure to “the magnificent seven”), the right value strategy could still appeal to disciplined investors keen to not overpay for stocks. The Fidelity Value Factor ETF (FVAL) has done very well despite the strange year for value. The strategy has returned 17.9% YTD, outperforming its averages as of December 11th.
Similar to FDLO, the strategy tracks a transparent, rules-based index. However, FVAL looks for U.S. stocks valued below what their fundamentals might suggest. Charging a similar fee of 15 bps, FVAL also invested in sectors like tech and finance. Taken together, the duo of factor ETFs from Fidelity Investments have provided strong examples of why factor ETFs can play a role in portfolios this year.
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