The Underperformance of Fidelity Quality Factor ETF: A Closer Look
The Fidelity Quality Factor ETF (FQAL) is an exchange-traded fund (ETF) that focuses on quality U.S. large-cap and mid-cap stocks. However, since its inception, it has underperformed the S&P 500 index. This underperformance may leave some investors puzzled, especially given that FQAL’s sector allocation, concentration, and downside risks are similar to the S&P 500.
Sector Allocation and Concentration
FQAL’s sector allocation is similar to the S&P 500, with the top sectors being Information Technology, Health Care, Financials, and Consumer Discretionary. The fund’s concentration risk, which measures the percentage of assets invested in the top 10 holdings, is also similar to the S&P 500, at around 20%. This indicates that FQAL’s underperformance is not due to sector allocation or concentration risks.
Downside Risks
Another factor to consider is FQAL’s downside risks. The fund’s standard deviation, which measures the volatility of returns, is similar to the S&P 500. This suggests that FQAL’s underperformance is not due to increased risk.
Lower Exposure to Growth Stocks
So, what could be causing FQAL’s underperformance? One possible explanation is its lower exposure to growth stocks. FQAL’s investment approach screens for stocks based on their quality factors, such as return on equity, earnings growth, and cash flow. This approach tends to favor value stocks over growth stocks. In a bull market, growth stocks often outperform value stocks, which could explain why FQAL has underperformed since its inception.
Effect on Individual Investors
For individual investors, FQAL’s underperformance may not be a cause for concern if they have a long-term investment horizon and a well-diversified portfolio. However, if a significant portion of their portfolio is invested in FQAL, they may want to consider rebalancing their portfolio to maintain their desired asset allocation.
Effect on the World
At a broader level, FQAL’s underperformance could have implications for the market as a whole. If other quality-focused funds experience similar underperformance, it could lead to a rotation out of growth stocks and into value stocks. This could potentially lead to a shift in market leadership and a reallocation of capital.
Performance in a Lower Rate Environment
It is also worth noting that FQAL may outperform in a lower rate environment. Lower interest rates can make smaller-cap equities more attractive, as they tend to have higher growth potential than larger-cap stocks. FQAL’s higher exposure to mid-cap and small-cap stocks could make it a potential outperformer in such an environment.
Conclusion
In conclusion, Fidelity Quality Factor ETF’s underperformance compared to the S&P 500 since its inception is not due to sector allocation, concentration, or downside risks. Instead, it is likely due to its lower exposure to growth stocks. For individual investors, this underperformance may not be a cause for concern if they have a long-term investment horizon and a well-diversified portfolio. At a broader level, FQAL’s underperformance could have implications for the market as a whole, potentially leading to a rotation out of growth stocks and into value stocks. Finally, FQAL may outperform in a lower rate environment, making it an attractive option for investors looking to capitalize on smaller-cap equities.
- Fidelity Quality Factor ETF (FQAL) focuses on quality U.S. large-cap and mid-cap stocks.
- Since inception, FQAL has underperformed the S&P 500 index.
- FQAL’s sector allocation, concentration, and downside risks are similar to the S&P 500.
- Lower exposure to growth stocks is likely the cause of FQAL’s underperformance.
- FQAL may outperform in a lower rate environment, favoring smaller-cap equities.
