For several weeks, a rotation has been underway in the U.S. market, with money moving away from some...
Fidelity Funds: Active Versus Passive
12/16/2013 9:00 am EST
Ten new Fidelity passive sector ETFs will track the industry benchmarks, while the respective Fidelity Select funds seek to outperform their indexes; here's a rundown on the differences between the active Selects and their passive ETF cousins, says Jack Bowers in Fidelity Monitor & Insight.
Relative to its new ETFs, Fidelity's Select funds put a sizable chunk of their assets in smaller, faster-growing firms.
While Selects often lag when small-caps are weak, they tend to deliver superior returns over the long run. Here's a review of active versus passive tradeoffs by industry:
Consumer Discretionary Index ETF (US:FDIS)
This is the one place where the index ETF (which is similar in risk and valuation) might be the better bet right now than the Select Consumer Discretionary (US:FSCPX).
Smaller firms cannot keep up with Amazon's revenue growth, but it's hard for an active manager to accept price-to-sales as a superior alternative measure to price-to-earnings. (Amazon is the top holding in the ETF, but is currently excluded from Select Consumer Discretionary.)
Consumer Staples Index ETF (US:FSTA)
It's a toss-up here. The active Select Consumer Staples (US:FDFAX) has greater emphasis on tobacco firms. That pushes it toward the value side, but also boosts risk some 10-15%.
Energy Index ETF (NY:FENY)
The active Select Energy (US:FSENX) has a clear advantage, because there are lots of smaller firms that can grow earnings faster than the heavyweights (Exxon and Chevron account for a third of the ETF, but only 20% of the Select). But the Select runs with about 15% more risk.
Financials Index ETF (NY:FNCL)
This group has a lot of recovering heavyweights (think banks), and is still prone to regulatory surprises (think Dodd-Frank and the unfinished "Volker Rule"), so the ETF may be the better bet in the short run than the Select Financial Services (US:FIDSX).
Longer term, however, Fidelity's emphasis on faster earnings growth is likely to be worth its 15% added risk.
Health Care Index ETF (NY:FHLC)
Fidelity's research strength makes the active Select Health Care (US:FSPHX) the better long-term bet. An overweight in biotech makes risk about 10-15% higher than the ETF, but from a cash-flow valuation standpoint, the active Select is a slightly better value.
Industrials Index ETF (NY:FIDU)
The active Select Industrials (US:FCYIX) has paid a price for excluding Boeing (which has struggled with its Dreamliner, but has solid growth prospects). But normally, good research should lead to superior results. The ETF is similar in risk and valuation.
Info Tech Index ETF (NY:FTEC)
This is another area where Fidelity research adds value. Select Technology (US:FSPTX) has about 15% more risk, but the ability to underweight Apple and Microsoft (which account for 22% of the ETF), in favor of faster-growing firms, is a big plus.
Materials Index ETF (NY:FMAT)
While both have similar risk, the active Select Materials (US:FSDPX) is the better value from both a P/E and cash flow standpoint. It may also benefit more from firms that use low-cost US natural gas as a feedstock.
Telecom Index ETF (NY:FCOM)
With Verizon and AT&T accounting for 44% of the ETF's assets, the active Select Telecommunications (US:FSTCX) can do well underweighting the behemoths, to seek faster growth here and abroad. The ETF is similar in risk and cash flow valuation.
Utilities Index ETF (NY:FUTY)
This is another area where research helps Select Utilities (US:FSUTX) a lot. With new trends in regulations, fuel costs, and customer-generated power, it's easy to spot and avoid trouble spots. The ETF is similar in valuation and risk.
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