FDLO - FDLO: Portfolio Of Low-Volatility Stocks Generating Consistent High Returns

2023-07-27 16:24:20 ET

Summary

• Fidelity® Low Volatility Factor ETF tracks an index of large-cap and mid-cap diversified U.S.-based stocks that have relatively low volatility. Its stock selection has turned out to be quite good so far.
• FDLO’s top holdings are in healthcare and technology-oriented stocks, and the fund has been able to generate consistently strong total returns over the years.
• During an economic downturn, low-volatility stocks reduce risk of uncertainty, but FDLO’s emphasis on technology stocks might lead to short-term downfall.
• FDLO’s high average P/E as compared to that of the S&P 500, consistent low yield, and being traded almost at par with its NAV, makes the ETF unattractive.

~ by Snehasish Chaudhuri, MBA (Finance).

Fidelity® Low Volatility Factor ETF ( FDLO ) invests in less volatile stocks of companies across diversified sectors in the U.S. market. This exchange-traded fund ("ETF") benchmarks its performance against that of the Fidelity U.S. Low Volatility Factor Index, which is designed to reflect the performance of large-cap and mid-cap stocks that are less volatile than the broader market. The fund also invests in lending securities to earn income.

FDLO has assets under management ("AUM") of $538.6 million, and an expense ratio of 0.3 percent. The turnover ratio is also under control at 28 percent. It pays quarterly dividends, but with a very low yield. However, the total returns have been impressive. FDLO is currently trading at a marginal discount of 0.1 percent from its net asset value.

Low-Yielding FDLO Has Consistently Been Generating Double-Digit Returns

Fidelity Low Volatility Factor ETF was launched by Fidelity Management & Research Company LLC almost 7 years back. The fund is co-managed by Geode Capital Management, LLC. The fund invests more than 70 percent of its net assets in four high-growth potential sectors - industrial, healthcare, financial and information & communication technology ((ICT)). Total return over the past one year stood at almost 14 percent, while the annual average total return over the past five years was also quite impressive at 11.15 percent. This growth figure was achieved despite a very low yield between 1.2 to 1.6 percent. Although, income-seeking investors may feel disheartened by such a low dividend, long-term growth seeking investors should be lured by this fund.

Top Investments In FDLO Are Mostly Healthcare Or Technology-Driven Stocks

18 out of FDLO's top 22 investments are either in technology-oriented stocks like Microsoft Corporation ( MSFT ), Apple Inc. ( AAPL ), Alphabet Inc. Class A ( GOOGL ), Cisco Systems, Inc. ( CSCO ), Intel Corporation ( INTC ), Texas Instruments Incorporated ( TXN ), Tyler Technologies, Inc. ( TYL ), Amazon.com, Inc. ( AMZN ), Visa, Inc. ( V ), Mastercard Incorporated ( MA ) and Fiserv, Inc. ( FI ) ; or healthcare stocks like UnitedHealth Group Incorporated ( UNH ), Johnson & Johnson ( JNJ ), Eli Lilly & Company ( LLY ), Merck & Co., Inc. ( MRK ), AbbVie Inc. ( ABBV ) Thermo Fisher Scientific Inc. ( TMO ), and Abbott Laboratories ( ABT ). V, MA, and FI are engaged in the business of transaction & payment processing services, which nowadays plays the role of more of a technology firm than traditional financial organizations. The same is true for retail giant AMZN. Together, all these 18 stocks account for 41 percent of FDLO's entire portfolio.

Impressive Price Growth Of Top Investments Resulted In High Returns For FDLO

It's no doubt that 2023 has been a great year for technology-oriented stocks. All the above-mentioned technology stocks recorded strong price growth within a range of 10 to 57 percent. These stocks also registered strong price growth over the past five years, too. Barring INTC and CSCO, all other stocks grew by at least 8 percent CAGR. The price performance of healthcare stocks were equally impressive over the long run. During the past five years, most of those stocks (except JNJ) grew by more than 10.7 percent. However, during this year, only LLY was able to generate a price growth higher than 4 percent. This has enabled FDLO to register a price growth of 11.3 percent. However, it is a bit surprising that the fund did not distribute this gain through its payout.

Access To Portfolio Of Low-Volatility Stocks Doesn't Come Without Baggage

Persisting with a portfolio of low-volatility stocks during economic downturn reduces risk of FDLO's portfolio, as it helps in protecting one's portfolio during a period of high uncertainty. However, investors need to also understand that access to such a portfolio will have its shortfalls. Fidelity Low Volatility Factor ETF currently trades at a price to earnings ( P/E ) ratio of 21x, a bit higher than that of the S&P 500 (SP500).

This portfolio is also highly focused on technology stocks. In general, technology-oriented stocks go through frequent periods of short-term bumps, even when they are going through a bullish run over the longer time horizon. There also lies a concern that after various months of steep rise, this sector's strength relative to the S&P 500 index may fade out.

Investment Thesis

Fidelity Low Volatility Factor ETF tracks a proprietary index of large-cap and mid-cap diversified U.S. stocks which witness lower volatility. The fund's sector allocations are consistent with the Russell 1000 index. This fund holds around 130 equities, a majority of which belongs to technology, healthcare, financial and industrial sectors. Most of its top investments are in healthcare and technology-oriented stocks. The stock selections from these two sectors have turned out to be quite good. On the back of price growth generated by such stocks, the overall portfolio of FDLO has been able to generate strong total returns both over the short-run as well as over the long run. The strategy of persisting with a portfolio of low-volatility stocks thus has been quite effective.

During an economic downturn, low-volatility stocks reduce risk to a certain extent, but do not entirely wipe it out. This portfolio is also highly focused on technology stocks, which witness higher uncertainty than the other sectors. FDLO pays quarterly dividends but generates a very low yield.

Fidelity® Low Volatility Factor ETF is trading with a high average P/E as compared to that of the S&P 500. As the technology sector is on a relentless rise, there is a possibility that the sector's strength relative to the S&P 500 index may fade out very soon. In such a case, the price growth, which is the only attractive part of this fund, may come down significantly. Thus, in absence of even a decent yield, I am not very excited about accumulating further units of Fidelity Low Volatility Factor ETF.

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