Home Adviser Fund Update Fidelity Chases the Factor Fad Published September 30, 2020 Table of Contents Fidelity Chases the Factor Fad Podcast: Ditch Your 401(k)? No Way! Vanguard Launches Bond ESG ETF Adviser Investments Named to Barron’s 2020 List of ‘America’s Best Independent Advisors’ Adviser Investments’ Market Takeaways Fidelity Chases the Factor Fad Never one to ignore a trend, Fidelity continues to embrace the rise of factor, or “smart beta,” funds. Earlier this month, Fidelity expanded its factor ETF lineup with the launch of a new strategy that blends several existing Fidelity factors into one package. Fidelity U.S. Multifactor ETF aims to provide investment returns that mirror the performance of Fidelity’s U.S. Multifactor Index, which contains stocks of large- and mid-cap companies with “attractive valuations, high-quality profiles, positive momentum signals and lower volatility” than the broader S&P 500. The new fund carried an expense ratio of 0.29% at its September 17 launch. And like Fidelity’s other factor-based products, it’s a blend of actively and passively managed ETFs. You could even call them “dynamic” investment vehicles. As a refresher, here’s how factor funds work. Rather than selecting stocks by company size (i.e., large-cap, small-cap) or sector (e.g., health care, technology), these funds adhere to rules based on factors like sales growth, dividend payouts, lower valuations or price momentum. Each factor is used to screen a universe of stocks based on the defined criteria. That’s where the “active” element enters: The quantitative models used to screen the stocks are tweaked and (ostensibly) refined over time by the funds’ portfolio managers. “Smart beta” refers to investors’ efforts to beat the market—not by picking managers or specific stocks, but instead by relying on factor-based quantitative models. (In investing parlance, “beta” traditionally referred to an asset’s risk relative to the market, but in recent years, it has come to function as shorthand for the market itself.) Fidelity first got into the factor ETF game in September 2016 with the launch of six funds: Core Dividend ETF, Dividend ETF for Rising Rates, Low Volatility Factor ETF, Momentum Factor ETF, Quality Factor ETF and Value Factor ETF. Following the positive response to the original six, Fidelity unveiled two international factor ETFs in January 2018 and two bond factor ETFs in June 2018. Since then, the Boston fund giant has added U.S.-focused Small-Mid Factor ETF and Stocks for Inflation ETF, as well as Targeted International Factor ETF and Targeted Emerging Markets Factor ETF. Unlike the initial group of factor ETFs, which focused on one particular investment theme, Fidelity’s new U.S. Multifactor ETF blends themes in search of companies with exposure to value, quality, low volatility and momentum. Fidelity U.S. Multifactor ETF is just the latest Fidelity effort to capitalize on its strong reputation for active management expertise while tapping into the growing popularity of not only ETFs but also “factor-based” investing. As you can see from the table below, of the first group of factor offerings, the dividend ETF has enjoyed standout popularity among Fidelity’s initial swath of factor offerings. Dividends are one factor that the new U.S. Multifactor ETF doesn’t take into consideration, so Fidelity is likely betting that a blend may have equal or more appeal to one-stop factor ETF shoppers looking for a non-dividend strategy than those concentrated on a single factor. Fidelity Factor Funds Haven’t Been Blockbusters wdt_ID Fidelity Factor ETF Inception Assets Under Management (millions) 1 Dividend ETF for Rising Rates 09/12/2016 299.90 2 High Dividend ETF 09/12/2016 546.40 3 Low Volatility Factor ETF 09/12/2016 374.40 4 Momentum Factor ETF 09/12/2016 96.20 5 Quality Factor ETF 09/12/2016 154.80 6 Value Factor ETF 09/12/2016 208.20 Note: Net assets as of 8/31/20. Source: Fidelity. The above factor ETFs carry a 0.29% expense ratio. Given that factor ETFs are considered to be more responsive to changes in the market than a broad index fund, we’ve compared them below to Fidelity’s Total Market Index Fund, which charges a meager 0.015% annual fee. Has the extra cost been worth it for Fidelity’s factor bells and whistles? Factor ETFs Have Failed to Justify Hype (or Extra Cost) wdt_ID Time Period Dividend ETF for Rising Rates High Dividend ETF Low Volatility Factor ETF Momentum Factor ETF Quality Factor ETF Value Factor ETF Total Market Index 1 Drawdown (2/19–3/23) -36.0 -39.6 -34.1 -33.6 -33.4 -37.2 -34.7 2 Recovery (3/24–9/2) 52.1 50.7 55.5 64.1 60.2 57.0 63.5 3 Full Period (2/19–9/2) -2.6 -8.9 2.5 8.9 6.7 -1.3 6.8 4 Since Inception 46.3 30.3 68.5 66.7 64.6 52.2 66.2 Note: Factor ETFs inception date is 9/16/16. “Since Inception” covers performance from 9/16/16–9/28/20. Sources: Morningstar, Adviser Investments. As you can see, none of these factor ETFs were particular standouts during their encounter with a bear market. Given the rapidity of the pandemic selloff earlier this year, investors might have hoped ETFs such as Low Volatility Factor or Quality Factor would be less susceptible to downside volatility. And aside from Momentum Factor catching the market’s recovery, it barely squeaked out ahead of the broader market, while the remainder of the factor entries came up short. Over 2020’s market downs and ups (mid-February through early September), only Momentum Factor beat the market. And since inception, the best of these initial factor offerings has barely outpaced the market, which isn’t saying much given the marketing push behind them. While Fidelity clearly sees a market for these products, we remain a bit skeptical of the entire “smart beta” or “factor” category—in some cases, the rationale for these funds seems to be more about marketing than creating high-quality investment options. Podcast: Ditch Your 401(k)? No Way! We’ve been surprised by a number of recent articles criticizing 401(k) plans, the centerpiece of many workers’ retirement savings. Is it time to reconsider using the 401(k) as a key tool to deliver financial peace of mind? Not in the least. Join our wealth management and financial planning experts for this engaging conversation on why the tax-advantaged benefits of 401(k) plans remain a must-have for most retirement savers. Tune in as we debunk costly misconceptions and provide clear advice to help you make the most of your 401(k) plan, including: Understanding your plan’s rules and what’s included How and why to automate savings Mastering withdrawals and after-tax savings Keeping an eye on fees How to avoid rollover pitfalls …and much more! We’re big believers in 401(k)s as workplace savings plans—we have one at Adviser Investments and encourage all of our employees to take full advantage of it. This illuminating discussion explains why we put such stock in them. Click here to listen now! And click here for a copy of the Key Financial & Tax Planning Data sheet referenced in the podcast. Vanguard Launches Bond ESG ETF Last week, Vanguard launched ESG U.S. Corporate Bond ETF, the fifth ESG (environmental, social and governance) or SRI (socially responsible investing) option in the fund family’s fold. We touched on the growing popularity of both ESG strategies and their ETF packaging when the new fund was announced. Unlike many ESG options rolled out over the last decade, this bond fund employs “negative screening” when selecting securities. In this case, it eschews businesses related to alcohol, tobacco, weapons, adult entertainment, thermal coal, and oil and gas. It also excludes companies with all-male boards of directors. Will adding an ESG screen improve performance in the bond market? We’re not convinced—mainly because the ESG/SRI marketplace is muddled with divergent theories, methodologies and opinions about what is and what isn’t an acceptable investment for these types of portfolios. Whether you use exclusion or detailed research and analysis, the outcomes will differ based on who’s performing the research and what individual criteria are involved. At Adviser Investments, we prefer to let the active managers we invest in select the best investment opportunities available. That said, if you feel an ESG fund will help you meet your investment goals and sleep better at night, let us know. We’ve developed two distinct ESG strategies that leverage our active-management and dividend-growth expertise to help our SRI-inclined clients align their investments with their values. To learn more, please click here. Adviser Investments Named to Barron’s 2020 List of ‘America’s Best Independent Advisors’ Adviser Investments ranked #30 on Barron’s list of “America’s Best Independent Advisors” in its Sept. 14, 2020 issue. The rating is based on a combination of qualitative and quantitative factors that include assets under management, revenues, regulatory records and size and experience of each firm’s team. This is Adviser Investments’ eighth consecutive year on the list. What distinguishes Adviser Investments from many of the other highly ranked advisers on the Barron’s list is that its clients represent a much broader swath of the investing public—including retirees, emerging affluent individuals and families, alongside trusts, institutions and company retirement savings plans—rather than solely high-net-worth investors. Despite managing over $6 billion in assets, Adviser Investments has maintained its longstanding commitment to delivering the personalized service of a small firm while providing a full range of services common to larger wealth managers. The Barron’s accolade is just one of several that Adviser Investments has earned of late. Earlier this year, Barron’s also recognized Adviser Investments among the top five firms on its list of the “Top Massachusetts Financial Advisors” for the seventh straight year. InvestmentNews ranked Adviser Investments among the top 16 on its 2020 list of “Best Places to Work for Financial Advisers.” The Barron’s rankings serve as a benchmark for participating wealth managers and a resource for individual investors seeking financial guidance and wealth management. To be nominated, advisers complete a detailed survey about their practices. Barron’s then conducts its own due diligence analysis and the resulting pool of candidates is then further screened to determine its list of the country’s top 100 advisers. Adviser Investments’ Market Takeaways Calm and clarity have been sorely lacking when it comes to market news recently—that’s why we’re providing Today’s Market Takeaways, short videos in which a member of our investment team analyzes what the market is telling us. Recently, Equity Research Analyst Kate Austin debunked the misconception she recently heard comparing investing in the stock market to legalized gambling, and Vice President Steve Johnson discussed the current economic outlook and finding value alongside market volatility. About Adviser Investments Adviser Investments is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, with particular expertise in Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. Our minimum account size is $350,000. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868. Disclaimer: This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Our statements and opinions are subject to change at any time, without notice and should be considered only as part of a diversified portfolio. Mutual funds and exchange-traded funds mentioned herein are not necessarily held in client portfolios. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. 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The Barron’s America’s Best Independent Advisers rankings consider factors such as assets under management, revenue produced for the firm, and quality of practice as determined by Barron’s editors. The award sponsor has not disclosed how many firms were surveyed or considered for this recognition, nor the percentage of total participants that ultimately received recognition. Prior to 2019 the award was called the Barron’s Top 100 Independent Wealth Advisers. For more information and a complete list of recipients, please visit https://www.barrons.com/report/top-financial-advisors/100/2020. Years received: 2020, 2019, 2018, 2017 ,2016 ,2015 ,2014 ,2013. The Barron’s Top Advisor Rankings by State (Massachusetts) (also referred to as Barron’s Top 1,200 Financial Advisers) considers factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. According to Barron’s, “around 4,000” advisory firms were considered for this recognition in 2020; with about 1,200 firms receiving recognition. For more information and a complete list of recipients visit https://www.barrons.com/report/top-financial-advisors/1000/2020?mod=article_inline . Years Received: 2020, 2019, 2018, 2017, 2016, 2015, 2014. The Financial Times 300 Top Registered Investment Advisers is an independent listing produced annually by the Financial Times and Ignites Research. According to the Financial Times, in 2019, approximately 2000 firms were invited to be considered for its list; 740 responded with 300 being named to this list. The listing reflects each practice’s performance in six primary areas: Assets under management (70-75% of a firm’s score), asset growth (15% of a firm’s score), years in existence, compliance record, credentials and online accessibility. For more information and a complete list of recipients visit https://www.ft.com/content/44d2b2b2-6cef-11e9-9ff9-8c855179f1c4. Years Received: 2019, 2018, 2016, 2015 & 2014. Awards referenced above do not consider client experience and are not indicative of such. Nor are awards indicative of future performance. Unless otherwise noted, Adviser Investments does not pay a fee to participate in any of these awards. Additionally, awards typically only consider and recognize participants that choose to participate; and are often based on information supplied by the participants—such information should not be assumed to be verified by the sponsor of the award. The Adviser You Can Talk To Podcast is a registered trademark of Adviser Investments, LLC. For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here. © 2020 Adviser Investments, LLC. All Rights Reserved.