On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research, Todd Rosenbluth, discussed the Fidelity Fundamental Small-Mid Cap ETF (FFSM) with Chuck Jaffe of Money Life. The pair discussed several topics related to the ETF, in order to give investors a deeper understanding of it.
Chuck Jaffe: One fund, on point for today. The expert to talk about it. This is the ETF of the Week!
Welcome to the ETF of the Week, where we examine trending, new, newsworthy, unique, and intriguing exchange-traded funds with Todd Rosenbluth, Head of Research at VettaFi. And at VettaFi.com, you’ll find the tools and research you need to become a savvier, smarter investor in ETFs.
Todd Rosenbluth, welcome back! It’s great to chat with you again.
Todd Rosenbluth: It’s great to be back and happy early July 4th!
Chuck Jaffe: And to you too! And of course, the question I have on July 4th weekend every other week is: your ETF of the Week is?
Todd Rosenbluth: The Fidelity Fundamental Small-Mid Cap ETF. FFSM.
Chuck Jaffe: FFSM, which is one of those mutual funds, you can’t really sound it out because it would be ‘fiffsum’, but it’s Fidelity Fundamental Small-Mid Cap.
You know, it’s not new. It’s not necessarily unique, but it’s got that trending, and I guess it’s got, from performance and what’s going on with small caps, a little newsworthy. Is that why it’s here?
Todd Rosenbluth: So there’s a few reasons. One, I was thinking about an ETF that would be appropriate for July 4th week. We talked in recent weeks about US large-cap and US large-cap value. But small and mid-cap companies in the United States actually get more of their revenue from the United States. And so that’s a good reason for us to be celebrating.
We at VettaFi had recently held an event, and what we heard is that heading into the second half of the year, advisors and investors are interested in small-mid cap strategies over anything else—-tied to international markets, tied to large-cap stocks, or tied to fixed income. Small and mid-cap companies are in favor and the strategies are.
And then this is a really strong-performing ETF. It’s been performing better than its peers, which have done well at large. And its Fidelity—Fidelity is known for active management. So if we’re going to talk about an active small-mid cap strategy, Fidelity is among those that’s top of mind.
Chuck Jaffe: Well, you can understand why the advisors are saying, ‘Hey, I’m really interested in small caps,’ because as good as the market has done this year, small caps have done better. As a category, they’re up about 15-16%, so about double the market. And then this fund, as we record this, is up more than 23% year-to-date. So, this fund has been killing it.
The question is, does this small-cap rally stick around? Because we keep seeing fits and starts of it, but we haven’t had the long-awaited, ‘Yes, small caps are back to earning 12% annualized compared to 10% for the stock market.’ That’s the historical norm. That hasn’t been what we’ve seen in recent years.
Todd Rosenbluth: Right. So smaller or small companies, whether small-mid cap or just small-cap companies in general, have been doing better this year. As you noted, this Fidelity fund has been doing even stronger. What I like about the active approach to it is that it brings the best of Fidelity—all of their active mutual fund managers’ best ideas—and brings them together in a more quantitatively oriented, actively managed, fully transparent ETF.
And so I think that there’s still room for this fund to be able to go and run. But part of that is because of that active component to it. So the active managers can find those best ideas, and we can get an efficient approach using the quantitative efforts that Fidelity has brought to bear on this strategy. So Fidelity has got a fundamental suite of active ETFs, and this fits in very nicely for people who are looking for a small-mid cap approach.
Chuck Jaffe: Very seldom on ETF of the Week do we talk too much about what’s in a name. But Fidelity, those extra words that they put in, like it’s not the Fidelity Small-Mid Cap ETF, it’s the Fidelity Fundamental Small-Mid Cap ETF. How important is the fundamentals right now in a market that’s been driven so much by momentum and the rest?
Todd Rosenbluth: So I think it’s extremely important, especially in the small-mid cap space. So what has rallied and often rallies when small caps rally are the unprofitable companies. And the Russell 2000, which recently rebalanced, goes through and focuses on companies based on just their size and regardless of quality. So, I do think a fundamental approach that’s looking at the earnings trends of an individual company before putting it in, looking at the valuation characteristics of those individual companies before it goes into the portfolio.
This bottom-up approach is particularly important, and so there will be changes to the portfolio based on fundamental reasons throughout the year. And that’s a good sign in this environment, because we might not see the unprofitable companies continue to rally for long if we get some more volatility in the market.
Chuck Jaffe: There are times when we talk about research beyond VettaFi’s here—we’ll talk about star ratings and the rest. But I want to point to research from Lipper, because Lipper gives this fund its highest marks for total returns, consistent returns, and tax efficiency. What it gives it a low mark for is preservation of capital, which I find really interesting because this fund, just through its five-year time horizon, got off to a bad start in terms of its first year—it lost money, but so did everybody.
And since then, it has been absolutely stellar. So, the preservation of capital idea, you know, you’re supposedly going out the risk scale when you go towards smaller companies. For this or any small-cap fund, how much do you say, ‘Okay, well you’re going to small caps. Buckle up that much more’?
Todd Rosenbluth: So I love that you bring things in that I was not prepared for. I’m not sure I understand how it can score well from a consistency standpoint but not do well from a preservation of capital standpoint. Those two things sound like they should be related to one another, so I can’t really quibble with or explain why Lipper does what Lipper does.
What I would say is this fund is going to differentiate itself with security selection. So it is going to be different than the benchmark. It is going to have security selection. It does have overweights in individual stocks, and that’s driven its most recent performance. That’s going to be okay. I think if you’re investing in small-mid cap, you’re taking on more risk than you would in large-caps.
You might be even taking on more risk than you would in developed international strategies that tend to be cap-weighted as well. So I’m happy with the fund’s recent performance. I’m happy with its overall structure. It makes sense to me.
There’s obviously going to be some counterpoints.
Chuck Jaffe: How does it play with other funds in the portfolio, especially if somebody already has small-cap exposure? Like, you don’t want to have too many funds in any one segment of the investment world. But is this an add-on if you’ve got something there because of the fundamental side of things, and this is just something to consider if you don’t have much small-cap exposure?
Todd Rosenbluth: So I’d imagine that people have some exposure to small caps within their overall portfolio, if for no other reason than small caps have done well. So they probably were underexposed to it because we’ve had a large-cap rally, a mega-cap rally for the last couple of years. And so smaller-cap strategies have underperformed. So if you don’t have any exposure, this is a good fund.
This is an actively managed, reasonably priced—I think it’s 43 basis points of an expense ratio for an active ETF, which is reasonably priced to me. This can slot nicely into an asset allocation strategy.
If you do have small-cap exposure and it is index-based, and perhaps it’s tied to the Russell 2000, which as I mentioned is a collection of some unprofitable companies,this can give you an active component with a fundamental approach, higher-quality companies that can fit into the portfolio. And you might also own separately—you might own an actively managed small-cap mutual fund.
So it’s possible that this fund has done better. It’s certainly going to be more tax-efficient. Not certainly, I just think it’s going to be more tax-efficient because it’s an ETF, and ETFs tend to not pass along capital gains. So I think FFSM can fit in nicely into a portfolio in a number of different use cases.
Chuck Jaffe: It can. What it can’t fit into is any sort of word that we can make from the letters FFSM, but that doesn’t stop it from being featured here. It is ‘fiffsum’, the Fidelity Fundamental Small-Mid Cap ETF, the ETF of the Week. Todd, great stuff. Happy holiday. We’ll see you again next week!
Todd Rosenbluth: Sounds great. Happy barbecues to everybody.
Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. And yeah, I’m Chuck Jaffe. You can learn all about my hour-long weekday podcast at MoneyLifeShow.com. Better yet, just go find it where you find your favorite podcasts.
Now, if you want to get more information on your favorite ETFs, or maybe your next favorite ETFs, or any of the funds we discuss here, go to VettaFi.com and dig into their tools for yourself. They’re on X at @Vetta_Fi, and Todd Rosenbluth, their Head of Research, my guest, he’s on X as well. He’s at @ToddRosenbluth.
The ETF of the Week is here for you every Thursday. Make sure you don’t miss an episode, even on holiday weeks, by following along on your favorite podcast app. And we hope you enjoy the holiday! We’ll be back with another ETF for you to consider next week. Until then, both happy holidays and happy investing!
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Note: This article was created in part through assistance from AI tools. The content has been thoroughly reviewed and edited by the author.
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.
