FFLC: A Solid ETF For Low Risk Tolerance Investors (BATS:FFLC)

As the US stock market has been achieving new highs month over month due to robust tech bull-run, investors with modest to moderate risk tolerance investors, who generally hesitate to chase high-beta investments and rely on low-beta value and dividend-focused stocks, have been struggling to generate healthy returns since early 2023. I believe betting on low-volatility stocks and ETFs wouldn’t help in generating market-beating returns in the current and future market conditions. Therefore, it might be wise to change the strategy by concentrating on stocks or ETFs with the potential to capitalize on the bull run while offering downside protection. One way to achieve a high risk-adjusted return is to chase ETFs, such as Fidelity® Fundamental Large Cap Core ETF (BATS:FFLC), which is composed of more than 104 well-established value and growth stocks from the S&P 500 index.

Stock Market Outlook

The S&P 500 rallied more than 32% in the last twelve months as tech stocks performed exceptionally with many major tech behemoths doubling and tripling in value. Moreover, despite lofty valuations, market fundamentals and earnings growth power suggest that the bull run is likely to last over the short to medium-term. In 2024, the Fed plans to slash rates three times while the US economic growth is expected to remain moderate. Unemployment rate has increased slightly and inflation appears to be falling into a targeted range. All this bodes well for a soft landing, which is a strong signal for the stock market and business activities.

Furthermore, the earnings growth power, particularly of tech stocks, is likely to back the uptrend. The tech sector is expected to generate 19% earnings growth while communication and consumer cyclical stocks are also poised to post a high double-digit earnings growth in 2024. Earnings and share price growth prospects of large-cap stocks from the financial, healthcare, and industrial sectors are also strong. Therefore, it is highly likely that the bullish market conditions are likely to last with the tech and growth stocks leading the uptrend.

Meanwhile, dividend focused stocks and ETFs from the defensive sectors are likely to underperform significantly in bullish conditions. For instance, Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) generated a share price return of 9% and the total return of 14% in the last twelve months, down substantially from the S&P 500’s price gain of 32% and the total return of 35%. The return from the iShares Core High Dividend ETF (HDV) continues to underperform than the broader market index. The sluggish share price and dividend returns are blamed on their significant focus on small and mid-caps from non-cyclical sectors. Over the past year, most of the S&P 500 returns and earnings growth have been driven from large-cap stocks from the tech, financial, healthcare and industrial sectors.

Why Does FFLC Is a Solid ETF for Low-Risk Tolerance Investors?

Although FFLC is a new ETF with low assets under management and trading volume, its portfolio composition makes it one of the attractive options for modest to moderate risk-tolerance investors. It has outperformed the broader market index by a significant percentage in 2023 and year to date. The ETF’s outperformance is attributed to its strategy of picking fundamentally sound large cap stocks by using a bottom-up approach. Its stock-picking strategy concentrates on identifying early signs of a shift in the market condition and aligning the portfolio with those changes to benefit from the shift. Furthermore, its portfolio composition includes top-performing stocks from both growth and value categories, which helps it capitalize on the current tech-driven bull run while offering a downside protection.

Its portfolio is well-diversified across various sectors, with fast-growing technology and communication stocks accounting for nearly 31% and 10% of the entire portfolio. Additionally, the ETF includes only top-performing mega-cap tech stocks that are benefiting from the AI boom. These stocks include Microsoft (MSFT), Apple (AAPL), Meta (META), NVIDIA (NVDA), Amazon (AMZN) and Alphabet (GOOG). All these stocks belong to the magnificent 7 group, which generated an average 110% price growth in 2023 and contributed significantly to the S&P 500’s bull run. Moreover, these stocks have extended their strong momentum into 2024. For instance, shares of NVIDIA are up nearly 90% due to bolstering demand for its AI-supported chips. Its December quarter revenue of $22.1 billion increased 265.3% year over year, with expectations for 82% revenue and 90% earnings increase in 2024. Microsoft and Alphabet are also expected to generate double-digit revenue and earnings growth.

Beside mega-cap tech stocks, the ETF has significant exposure to large-cap healthcare, financial and industrial sectors. These sectors are also expected to generate double-digit earnings growth in 2024. Consequently, their shares are also following the broader market bull run. The healthcare sector is up 6% year to date while the industrial and financial sectors reported nearly a 10% gain. Overall, the ETF’s portfolio composition positions it to capitalize on the bull run and lower the downside risk.

Peer Comparison and Quant Rating

FFLC outperformed its peers in the last twelve months, thanks to its portfolio management strategies. Its peers, such as Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST), generated healthy returns but underperformed compared to FFLC. The underperformance is blamed on its significantly diversified portfolio and focus on a large number of mid and small-cap stocks. Similarly, Goldman Sachs MarketBeta US Equity ETF’s (GSUS) portfolio composition of nearly 484 stocks lower its concentration on top-performing stocks and increases its exposure to non-profitable stocks from small and mid-cap segment.

FFLC also appears like the best ETF among its peers based on quant rating. Its A-plus score on the momentum factor and negative A on risk vindicates my opinion about its potential to generate high risk-adjusted returns. Its dividend score is low but dividends don’t matter when chasing returns through price appreciation in bullish market conditions. It is also ranked at 1st spot in its sub-asset class.

In Conclusion

Investors with modest and moderate risk-tolerance can also achieve high risk-adjusted returns in a bullish condition by investing in ETFs like Fidelity® Fundamental Large Cap Core ETF. Its fundamentally strong portfolio has the potential to capitalize on the uptrend while lowering the downside risk. The ETF’s recent performance also suggests that its portfolio is significantly aligned with market conditions and likely to thrive in a bull run.