FFLC: Active Large Cap ETF Now on My Watchlist (BATS:FFLC)

Investment thesis

Today’s article begins my coverage of the Fidelity Fundamental Large Cap Core ETF (Bat: FFLC), an exciting, actively managed play from Fidelity with a new management team as of February 2024. Although past performance may not help the valuation These New Managers’ Approaches My review of FFLC’s fundamentals reveals a portfolio that is strong in quality, growth and value but weak in diversification, which is typical of a “stock picking” fund. Whether that’s enough to compete with passive alternatives like the SPDR S&P 500 ETF (spy) or low-cost active funds like the Dimensional US Equity ETF (DeVos) is an open question. However, FFLC is good enough to include on my watchlist, and I look forward to walking you through its strategy and fundamentals in more detail below.

FFLC Overview

FFLC is an actively managed fund that launched on June 2, 2020, and currently has a market cap of $318 million. Assets under management and expense ratio is 0.38%. This expense ratio is lower than the 0.48% average for large-cap active ETFs but higher than the 0.09% featured by DFUS, another active fund I want you to consider. For the extra cost, I hope FFLC offers better basics.

As I mentioned in my investment thesis, the performance of FFLC since its inception date may be irrelevant, as stated in the prospectus summary:

Prior to February 26, 2024, the Fund was called the Fidelity New Millennium ETF, and the Fund operated under certain different investment policies. The Fund’s historical performance may not be representative of its current investment policies.

I tend to take this statement at face value and completely ignore previous findings. However, according to her Annual Report For the year ended July 31, 2023, FFLC’s six largest holdings were Microsoft (MSFT), apple (Camel), Amazon (Amzn), nVidia (NVDA), meta-platforms (dead), and the alphabet (Google). As shown below, much remained the same until June 4, 2024.

Although I recommend taking any short-term performance chart with a pinch of salt, the 124.95% total return since July 2020 is impressive, as are the “worst year” and “maximum drawdown” statistics.

FFLC Version bulletin It adds more color to why these results hold up. Essentially, the advisor “invests the fund’s assets in companies that it believes have above-average growth potential,” which helps explain its recent strong returns. However, the advisor also uses a bottom-up approach to evaluate other fundamental factors such as earnings expectations and quality of management. Although the prospectus states that the advisor is permitted to invest in value stocks if market conditions warrant it, I have not found anything written about the valuation metrics used. The price-to-book ratio is often used among many active managers, Including dimensionsAs I’ll explain shortly, I think that’s the case here as well.

FFLC analysis

Rankings vs. 229 large-cap ETFs

The following table summarizes how I rank FFLC on ten key factors that I believe drive an ETF’s success. There are 229 stocks in the large-cap mix category, and FFLC scores well in terms of momentum (No. 14/229) and sentiment (No. 43/229). I’m happy about this, because I’m skeptical of funds with great price momentum but lack earnings results to back it up. Say what you want about potentially overvalued growth stocks like Nvidia, but the company has delivered near double-digit earnings surprises for six straight quarters and has a stellar “A-” seeking Alpha EPS review score, better than 86. % of S&P 500 stocks.

FFLC also ranks well for growth (No. 41/229) based on research on Alpha Growth scores. After reading the prospectus, this rating is not surprising, but it is nice to see confirmation. As for potential weaknesses, I think the diversification rating of 138/229 indicates a healthy amount of individual stock risk taken by managers. FFLC has 82.59% of assets invested in the top 25 sub-industries compared to 70.43% for SPY, so at the very least, we can expect a less consistent, but hopefully superior, set of returns compared to SPY.

FFLC Basics by Company

Next, I would evaluate FFLC’s holdings more closely. The following table highlights selected key metrics for the top 25 companies, totaling 60.54% of the portfolio.

Here are three notes to take into consideration:

1. All three ETFs have relatively high exposure to large-cap stocks, as evidenced by their large weighted average market cap numbers approaching $1 trillion. Compared with SPY and DFUS, FFLC increases the weight of Nvidia and Meta platforms by 2% but reduces the weight of Apple by 2.5%. Looking at the earnings growth rates above, we can see why. Remember how the FFLC prospectus noted that the strategy is growth-oriented, and Nvidia and Meta Platforms estimated earnings growth rates of 119.15% and 39.15%. This flows into a portfolio weighted average earnings growth rate of 13.53%, so I think it’s fair to say that FFLC is marginally more aggressive.

2. There is some truth to the statement that we invest in a single stock market. Nvidia’s 135.12% year-to-date price return beats its large-cap competitors, and using the S&P 500 index weights as of January 1, 2024, I determined it contributed 37.64% of the market’s gains this year. Combined with the obvious risks a single stock presents, this makes interpreting performance charts more difficult. For example, FFLC’s high returns this year may be attributed to its superior strategy, but they resulted from its high allocation to Nvidia, which was probably just good luck. In other words, we need to know if the “magic” of FFLC can be replicated if Nvidia’s value declines, and unfortunately, we don’t have that information yet.

3. I mentioned previously how FFLC managers are likely to use the stock price-to-book ratio to assess value, and this table reveals a materially lower weighted average ratio of 9.52x compared to 11.32x and 10.89x for SPY and DFUS. In this ratio, FFLC ranks an impressive 29/229 in the large-cap value category, but is slightly worse in the other valuation ratios. The following calculations and ratings were calculated using the simple weighted average method:

• Front-wheel drive price earnings: 26.65x (#44/229)
• TTM Price Gain: 32.54x (#46/229)
• TTM Price – Cash Flow: 23.46x (#40/229)
• TTM Sales Price: 7.77x (#51/229)

As with growth, FFLC appears to have a slight valuation advantage over most of its peers, and has not sacrificed quality to do so. FFLC’s earnings score of 9.20/10 falls between SPY and DFUS and ranks slightly above average in the Large Cap Mix category (#99/229).

Investment recommendation

FFLC is an actively managed large-cap ETF that features an impressive set of fundamentals, particularly around growth and value factors. I’m not yet convinced it’s good enough to justify a 0.38% expense ratio, nor do I think it’s as well diversified as a “core” fund should be. However, it offers a different look at US giants by weighting the companies whose managers believe have the best growth potential. So far, the strategy has been successful, and for these reasons, I give FFLC a strong “Hold” rating and suggest you add it to your watchlist. Thank you for reading, and I look forward to your comments below.