FBCV: a leader in the race for value

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GFCV Strategy and Portfolio

The Fidelity Blue Chip Value ETF (BATS:FBCV) is an actively managed ETF launched on 06/02/2020. It has a 12-month payout yield of 3.47%, a total expense ratio of 0.59% and net assets worth about $114 million. It pays quarterly distributions. As described in Fidelity’s prospectus, the fund is different from traditional ETFs:

It is not required to publicly disclose all of its portfolio holdings on each business day. Instead, the fund publishes a “tracking basket” on its website each business day, which is designed to closely track the fund’s daily performance but is not the fund’s actual portfolio.

The FBCV invests »in companies that FMR believes are undervalued in the market relative to factors such as assets, sales, earnings, growth potential, or cash flow, or relative to the securities of other companies from the same sectory.

To see the current tracking cart, follow this link. Its weight overlap with the actual portfolio is 82%.

Portfolio turnover is quite high: 97% over the last fiscal year.

The FBCV benchmark is the Russell 1000 Value Index. In this article, it will be compared to the iShares Russell 1000 Value ETF (IWD), as well as the SPDR S&P 500 Trust ETF (SPY). The usual valuation ratios are shown in the following table.

FCCV

IWD

TO SPY

Price / Earnings TTM

16.28

14.01

8:15 p.m.

Price / Book

2.28

2.08

3.85

Price / Sales

1.54

1.67

2.55

Price / Cash Flow

11.9

10.85

15.85

Source: Loyalty

FBCV is cheaper than SPY on the 4 ratios and a little more expensive than IWD, except in price/sales.

Since its inception in June 2020, FBCV has outperformed IWD and SPY by 5.6 and 10.7 percentage points, respectively (see next chart). This is the share price performance excluding dividends.

GFCV vs benchmarks

GFCV vs benchmarks (TradingView on SeekingAlpha)

The following chart compares FBCV to three other large- and mid-cap value ETFs by different issuers and based on different underlying indices. The FBCV still leads the pack.

GFCV vs Competitors

GFCV vs Competitors (TradingView on SeekingAlpha)

Why is GFCV better? Stock indices generally rank all stocks according to the same criteria. This means that valuation ratios are considered comparable across sectors. Obviously, they are not: you can read my monthly dashboard here for more details on this subject. One consequence is to favor sectors where valuation ratios are naturally cheaper, notably financials. The FBCV prospectus doesn’t say much about strategy, but it does reveal that companies are compared to their peers in the same industry. The bias across all sectors and industries may not be completely fixed, but at least it is reduced.

Another shortcoming of value indices stems from the use of the price-to-book (P/B) ratio as the primary factor. Speaking of probabilities, a large group of companies with a low P/B contains a higher percentage of value traps than a group of the same size with price/earnings, price/sales, or price/cash flow. available low. Statistically, such a group will also have higher volatility and larger price declines. The following table shows the return and risk measures of the cheapest quarter of the S&P 500 (i.e. 125 stocks) measured in price/pound, price/earnings, price/sales and price/free cash flow . The sets are reconstituted annually between 01/01/1999 and 01/01/2022 with elements of equal weight.

Annual return

Sampling

Sharpe report

Volatility

Cheapest district in P/B

9.95%

-72.36%

0.48

21.05%

Least expensive quarter in P/E

11.25%

-65.09%

0.57

18.91%

Cheapest quarter of P/S

12.62%

-65.66%

0.6

20.46%

Cheapest quarter in P/FCF

12.23%

-63.55%

0.61

19.05%

Data calculated with Portfolio123

FBCV is likely to use similar ratios, including one closely tied to P/B. However, it also uses a “growth potential” criterion. This could be the PEG ratio or another metric that uses estimates of EPS growth or sales growth. Either way, it makes GFCV better than regular value index ETFs by reducing the risk of picking value traps.

Carry

FBCV is an actively managed value ETF in a large and mid cap universe. It lacks the transparency of traditional ETFs: strategy and holdings are not disclosed by Fidelity. Moreover, its asset value and average trading volume are low. Despite these drawbacks, it can be an attractive alternative to other large-cap value ETFs. It has beaten its main competitors and the S&P 500 over the past 2 years, and it implements a smart concept of value taking into account industry and growth.

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