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The Fidelity Blue Chip Value ETF (BATS:FBCV) invests in companies recognized as leaders in their industries and undervalued according to the portfolio management team at Fidelity. The idea here is that by focusing on high-quality companies screened for positive fundamentals, the active equity strategy may deliver excess risk-adjusted returns and long-term capital appreciation.
Indeed, while FBCV is relatively new with a fund inception date in 2020, the performance history thus far has been impressive, managing to beat out its style benchmark and the S&P 500 (SPY). In our view, FBCV is a good option as a core holding for valued-oriented large-cap equities exposure that can work in the context of a broader, more diversified portfolio.
What is the FBCV ETF?
The key point about FBCV is that the fund is actively-managed, meaning it’s not intended to track any underlying index, and each investment is at the portfolio manager’s discretion.
In this case, the focus on “Blue Chip stocks” is simply a term within investing jargon referring to established and well-recognized companies expected to be successful over the long run. FBCV attempts to identify the best stocks that personify those ideals and appear favorably priced relative to peers based on financial metrics such as price to an asset, sales, earnings, and cash flow trends.
source: Fidelity
Another important aspect of the Fidelity Blue Chip ETF is that the fund is “semi-transparent“, not regularly disclosing its underlying holdings, in contrast to typical ETFs that report daily. The reason for this is to provide the fund manager with greater flexibility in the strategy implementation as part of its effort to outperform.
In practicality, FBCV is presenting its holdings through a monthly basket illustrative of the strategy, but simply not getting into the details of every single transaction. Again, the purpose of this method is to conceal what the fund manager believes to be proprietary research and current views on individual investments.
From the last update, we find exactly what we would expect in a portfolio of Blue Chip value stocks with mega-cap companies among the 85 total holdings. Berkshire Hathaway Inc. (BRK.B) and Exxon Mobil Corp. (XOM) were reported as the largest positions, both with a 5.2% weighting. Cigna (CI) at 3.1%, followed by JPMorgan Chase & Co. (JPM) at 2.8% and Centene Corp. (CNC) round out the top-5 investments.
source: Fidelity
So while there aren’t any big surprises as to which stocks FBCV considers Blue Chips, the differentiation here is the particular over or underweighting by the company and at the sector level relative to the fund’s performance benchmark of the Russell 1000 Value Index, where we can proxy by tracking the iShares Russell 1000 Value ETF (IWD).
For example, compared to the benchmark that assigns a 20% weight to the Financial sector, FBCV is positioned at 22%. Consumer Discretionary represents 6% within the Russell 1000, but only 4.4% in FBCV. Those types of spreads help explain the performance difference based on the fund managers’ stock selection.
FBCV Performance
We already mentioned how FBCV has outperformed the S&P 500 and the Russell 1000 since its inception, with a cumulative 45% total return. Over the past year, the fund is down -2.8% compared to -3.0% in IWD, and -8.0% in SPY. This timeframe captured a historically volatile period in financial markets, defined by record inflation and a sharp increase in interest rates as a headwind to risk assets.
The sense is that Blue Chip stocks and value names in particular were resilient, compared to more speculative segments of the market or growth that faced deeper losses.
While the total return spread in FBCV to IWD isn’t necessarily something to write home about, what is also important is that it was able to achieve that result with a lower max drawdown as a measure of less risk. Between January 2022 to a low in September last year, IWD fell by as much as -20.3%, while FBCV fared better declining by -16.2% as a max drawdown.
For context, SPY declined by as much as -24% over this same timeframe. That risk improvement by the Fidelity fund suggests the strategy was more defensively positioned over a period of extreme volatility. The results help justify the fund’s 0.59% expense ratio, which is higher than passively-managed alternatives, but otherwise consistent with this category.
What’s Next for FBCV?
There’s a good case to expect value stocks to continue outperforming based on ongoing macro headwinds. Uncertainties related to economic growth, trends in inflation, and the direction of interest rates are expected to continue for the foreseeable future, translating into volatility in stocks.
This type of environment makes the Blue Chips within FBCV attractive with an understanding that their fundamentals and trends in earnings are more consistent across the market cycle. If we were very optimistic about the economy and bullish on equities, growth stocks would likely be appealing with the ability to outperform.
It’s worth noting there is the alternative Fidelity Blue Chip Growth ETF (FBCG) which takes the same actively-managed strategy as the value version but is applied to growth stocks. In this case, FBCG hasn’t had the same type of success as FBCV in beating its growth benchmark, although we would still expect it to rally in a scenario where risk assets gain momentum.
So when we put it all together, the attraction of the Blue Chip value fund is that it has a good balance of performance and risk profile while we’ll be positioned to generate positive long-term returns.
Final Thoughts
With a universe of over 2,000 different ETFs for investors to choose from, it’s difficult for new entrants to stand out from the crowd. While we’ll need several more years of data through a complete market cycle to provide an affirmative answer that FBCV can consistently deliver Alpha, the results over the past two years speak for themselves. Overall, the Fidelity Blue Chip Value ETF is a high-quality option that is well-positioned to perform well over the long run in different market environments.
Source: seekingalpha.com
