Fidelity's Active Stock ETFs: At Least One Is Worth Owning

In my article here on Seeking Alpha from over eight months ago, I suggested that while index, unmanaged funds have for years and years consistently proven to be better performers than most managed funds, current turbulence may be changing that at present as a result of upsetting market conditions.

It is unlikely that most long-term investors in ETFs and mutual funds will be dissuaded from the strong past evidence in favor of passive funds. The advantages of index funds are now well known, with the lion's share of investor money flowing into unmanaged ETFs and funds, and especially out of mutual funds whose manager hopes, usually unsuccessfully, to beat index funds. With miniscule expense ratios, unmanaged funds typically start out with a large cost advantage that handicaps traditional managers and puts them behind from the get-go. And in attempting to time the market has long been shown to be a losing strategy.

Yet in spite of this, while money continues to flee managed mutual funds, according to a recent Wall Street Journal article, active ETFs have taken in about 30% of the money flowing into ETFs so far in 2023. Apparently, many investors are still of the belief that the inherent flexibility accorded to active ETF managers will help them better avoid poorer performing stocks, especially in a seemingly prolonged market downturn, and find the winning ones, impossible for ETFs that follow a passive index.

In my Seeking Alpha article cited above, I examined the managed ETF and mutual fund offerings of Vanguard to determine whether, over the prior 12 months at the time, the lineup of the managed funds was doing any better than equally matched manager-less funds.

Vanguard had six actively managed U.S. stock ETFs and 18 such mutual funds. In five out of the six ETFs, the active ETFs outperformed Vanguard passive ones of the same category, with one "tie;" for mutual funds, 10 out of 18 active ones outperformed. These results suggested to me that active management might be superior in times of market stress and volatility as we were undergoing between Oct. 2021 and Sept. 2022, but we are still undergoing now. The factors causing that stress and volatility were, among others, rising interest rates, a Fed rising rate campaign with a possible recession ahead, and the uncertainties of the recovery from Covid.

Of course, this was a somewhat limited sample of managed vs. unmanaged funds with performance being measured over a limited period of time. Would similar results be observed including additional funds from one of the other major providers of funds, namely Fidelity Investments, and over a somewhat longer period of time?

Fidelity has seven such actively managed ETFs for which a comparable index ETF can be readily found. All seven are fairly new funds having been introduced during the last three years or less. However, all but one of these funds appear to be extensions of popular Fidelity mutual funds.

In the table below, I show these ETFs, their starting dates, and a comparison of their performance results with selected index funds since the Fidelity funds' starting dates.

It should be noted that since Vanguard's index funds are considered an excellent proxy for the unmanaged returns of their matched category, it made sense to use similarly matched Vanguard ETFs as a proxy against which to see if the Fidelity funds were able to outperform the usually highly respectable returns of the Vanguard funds. This, too, would provide an interesting comparison between some of Vanguard's most popular funds and the less well-known Fidelity ETFs.

Results

Note 1: All returns are not annualized through May 19

Note 2: Comparison index funds are as follows:

-Large Growth - Vanguard Growth ETF (VUG)

-Large Value - Vanguard Value ETF (VTV)

-Real Estate - Vanguard Real Estate ETF (VNQ)

-Mid-Cap Blend - Vanguard Mid-Cap ETF (VO)

As can be seen, six out of seven of the actively managed funds came out ahead of the non-actively managed Vanguard funds of the same category, although in one case, the difference was negligible.

Discussion

Fidelity goes as far as stating that "the ETF game has changed" in describing their active ETFs. It gives the following three reasons for investing in these funds: tax efficiency, potential outperformance, and access to Fidelity's research capabilities. But they also caution that active ETFs may trail an unmanaged ETF.

The results of the above comparisons offer further confirmation that actively managed funds may outperform when market conditions are such that the fund manager may be able to more successfully manipulate a portfolio to avoid losses and to find winning stocks than a fund that has no ability to do that, that is, an index fund.

The one fund that did the best in both an absolute and relative sense was the New Millennium ETF. The fact that appears to have contributed most to this result was the fact that the manager shifted the fund's portfolio away from Large Value toward Large Growth. This appears to have enhanced performance. This wouldn't have been possible with an index fund. This type of active management continues to make the fund appealing in the current investment environment.

The worse performing ETF vis-a-vis its comparable index fund was Growth Opportunities ETF. This shows the potential hazards of investing in an actively managed fund as opposed to sticking with an index.

Given that an active approach to ETF investments may have an edge so long as the market remains troubled by high rates, a Fed determined to bring down inflation even if it causes a recession, and now worries about the debt ceiling, it may prove wise to have at least one actively managed fund, whether an ETF or a mutual fund.