Fidelity Small-Mid Multifactor ETF

FSMD

Market cap $1.68B

FSMD offers diversified small- and mid-cap exposure with a multi-factor approach, emphasizing valuation, quality, momentum, and low volatility. The fund trades at an attractive discount to benchmarks and peers, while maintaining profitability and a defensive sector tilt. FSMD has outperformed the S&P MidCap 400 and most peers over 5 years, with lower volatility and a strong Sharpe ratio.

Fidelity Small-Mid Multifactor ETF invests in small and mid-cap U.S. stocks with value, quality, momentum, and low volatility. FSMD is highly diversified across nearly 600 stocks, with a focus on industrials and financials, and has growth characteristics. FSMD has outperformed the S&P SmallCap 600 Index and several small-cap multi-factor ETFs.

I updated my universe of exchange-traded funds to track based on superior long-term performance. Nearly 450 ETFs are ranked based on short-term monthly returns, exponential moving average, and money flows into funds. With valuations and concentrations high, I select twenty trending ETFs Lipper Categories with less risk of correction in 2025 for further analysis.

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.

The market regime may continue to shift in response to easing rates, potentially serving as a catalyst for SMIDcap and mid-cap companies. The rate cut cycle is expected to provide more relief for smaller and more leveraged companies needing more access to capital markets than larger companies.

Market volatility remains a fairly persistent aspect for investors to contend with in the back half of the year. With elevated short-term volatility risks in the fourth quarter, Fidelity offers five ETFs worth consideration, including a screen for lower volatility stocks.

Interest rate cuts historically benefit equities, resulting in outperformance for the next year after the initial rate cut. Pockets of more pronounced opportunity may exist within stocks for investors in a declining rate environment.

Lower interest rates are expected to improve the outlook for small and mid-cap stocks, making FSMD a suitable investment in this environment. FSMD's multifactor approach has delivered superior returns and lower volatility compared to benchmarks like the S&P MidCap 400 and Russell 2000 indices. FSMD's diversified allocation and reasonable valuation, with a P/E ratio of 16.0x, position it favorably among small and mid-cap ETFs.

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.

Several potential risks loom over markets in the second half, particularly within the U.S. For investors looking to dampen volatility, invest in quality, or seek returns through value or momentum strategies, the Fidelity Multifactor ETF suite may be worth consideration. Recession concerns rose once again in August and signs of economic slowing in the U.S.