Fidelity Fundamental Small-Mid Cap ETF

FFSM

Market cap $1.35B

Fidelity Fundamental Small-Mid Cap ETF earns a 'Buy' rating based on its strong recent momentum, superior risk-adjusted returns versus passive benchmarks, and attractive valuation. FFSM's active management and diversified holdings position it to benefit if market leadership broadens beyond mega-cap technology stocks. While FFSM has a higher expense ratio (0.43%) and weak dividend profile, its risk-adjusted outperformance and growth/value blend justify its use as a satellite allocation.

Active ETFs continue to experience explosive industry growth, and Fidelity is positioning itself as a leader. Fidelity has been long known for its fundamental stock-picking based active strategies, built on a rich heritage of deep company research.

Fidelity Fundamental Small-Mid Cap ETF is an active, non-transparent vehicle with a strategy bringing together quantitative and fundamental methods. FFSM is beating IVV this year amid the capital rotation. Moreover, it has outperformed a few SMID vehicles, including IJH and SMMD since the strategy change in 2024. Besides, its portfolio has a few advantages over that of IJH in terms of growth (including GARP) and momentum characteristics.

Fidelity Fundamental Small-Mid Cap ETF offers active small- and mid-cap exposure but lacks daily portfolio transparency, with a moderate 0.43% fee and low 0.7% yield. Performance has improved recently, but FFSM still trails my preferred ETF - EZM - in risk-adjusted returns and value allocation. FFSM's short track record and mixed results led me to assign a Hold rating, favoring EZM for my portfolio.

After a strong 2024, Fidelity ETFs gathered approximately $10 billion in the first four months of 2025. Demand for actively managed products has been a key driver as Fidelity leans further into the ETF market.

One month into 2025, and ETFs are already off to the races, hauling in over $100 billion in net inflows in January. Hefty gains across the board reflect continued bullish sentiment on the stock market overall.

Investor appetite for growth really is something to behold.  Coming into the week of the U.S. presidential inauguration, we had been talking about the importance of diversification in the face of so much uncertainty, geopolitical risk, and lofty equity valuations following massive market gains in recent years.

If 2024 was the year of mega-cap tech, 2025 could potentially be the year of small- and mid-cap firms. Just a handful of big firms drove a significant percentage of returns last year, which many investors rode to a successful 2024 overall.

Small- and mid-cap (SMID cap) ETFs have seen strong flows recently, making it important that investors fully understand why moving down the cap spectrum can make sense in a falling rate environment. In short, small-and mid-cap stocks, or SMID caps, are more sensitive to interest rates and economic conditions than larger companies.

As the Federal Reserve turned its eye from inflation to protecting the labor market at August's Jackson Hole meeting, markets rose in hopes of rate cuts beginning at the end of the third quarter. A falling rate environment may prove particularly supportive for small-cap stocks.