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A Goldilocks investment option?

These ETFs aim to offer a sweet spot.

Key takeaways

  • Indexing isn't the only way to access both broad diversification and low costs. Some types of active investments may offer these benefits too.
  • For example, some systematic ETFs may provide a thoughtful alternative to passive investing.
  • These ETFs aim to deliver the diversification benefits and low costs that most ETFs offer, but with the upside ambitions and research-driven insights of active management.
  • Rather than taking big risky bets, these ETFs may aim for modest but consistent outperformance that can add up over time.

For many investors, 2 top priorities in building a portfolio are to target broad diversification and manage investing costs.

They’re likely right to make these features a priority. Diversification is often called the “only free lunch” in investing for the powerful way it can reduce risk and improve risk-adjusted returns. And every dollar you save in investing expenses is another dollar that can be put to work, potentially growing for you. Keep in mind, diversification and asset allocation do not ensure a profit or guarantee against loss.

But what some investors might be getting wrong is where they look for these features. While many investors might think that passive investments—like mutual funds or ETFs that track an index—are the only way to access diversification and low costs, there are actively managed investments that can offer these benefits, plus a little something extra.

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These actively managed investment options don’t force investors to accept the returns of an index (and to accept all the index’s underlying stocks, warts and all). With thoughtful construction, some active ETFs can provide the low costs and broad diversification that many investors associate with indexing, but with the added risk management, downside nimbleness, and upside ambitions of active management.

“For many investors, using a low-cost option to get broad stock-market exposure makes all the sense in the world,” says Mike Hagopian, an institutional portfolio manager on Fidelity’s Quantitative Research and Investments team. “Products that track indexes like the S&P 500® can offer a good starting point, but it may be possible to improve investors’ return outcomes, while still holding onto a lot of the same benefits.”

For example, many systematic ETFs aim to capture those benefits and add to them.

What are systematic ETFs?

Although systematic ETFs are actively managed, they might not fit the mold of what investors think of when they hear “active management.” Instead of relying mainly on human judgment, they follow a quantitative, rules-based process that uses data, computer modeling, and testing as a core part of their investing approach.

Because of the efficiencies that this type of management affords, these ETFs may be offered at a fraction of the cost of traditional active management.

Aiming to capture the best features of multiple approaches

Fidelity’s lineup of Enhanced ETFs, for example, follows a unique systematic approach that aims to offer a thoughtful alternative to passive investing.

These ETFs each take a broad universe of stocks as a starting point, but then use a systematic approach to refine that universe of stocks into a portfolio with a potentially more attractive risk-return profile than an index. The resulting portfolio doesn’t stray far from its underlying index, and so avoids big risky bets, but rather leans slightly into potentially more attractive stocks.

To identify those stocks, the underlying computer models follow the data, taking a ruthlessly objective approach that considers a vast array of inputs. The models can pore over text from earnings call transcripts, for example, analyzing whether a company’s forecasts are based on hard data, or only on conjecture. They can scour patent filings to see if a company has been quietly building up innovations, spring-loading it with potential future growth.

There’s no single data point—in the oceans of publicly available data that these models process—that can unlock the secret of a winning investment on its own. Instead, the team’s process harnesses hundreds of thousands of gigabytes of data, which together build a mosaic that can help highlight potentially attractive stocks.

At the same time, there are moments when data doesn’t capture the full picture, such as when an unforeseen risk emerges or news developments cause the landscape to suddenly shift. Those are the moments when having a steady human touch can help, which is why an investment team provides daily oversight of the ETFs and makes adjustments when needed. For example, during the 2021 meme-stock rally, the investment team closely monitored and, in some cases, tightly managed holdings of stocks that were being driven by social media fads and so were challenging to quantitatively evaluate.

Features of systematic ETFs

Here is more on both the potential advantages and risks of systematic ETFs, including the Fidelity Enhanced ETF lineup.

Broad diversification

Systematic ETFs can seek to maintain the same high levels of diversification—among stocks, sectors, and industries—that many investors would seek for their “core” portfolio holdings.

Competitive costs of active management

Because initial stock selection and number crunching is done by computer models, these ETFs may be offered at a cost point that’s lower than many actively managed investment products, although expenses may be higher than some indexed ETFs.

Potential for added upside or downside

While index funds require investors to settle for whatever the market returns, these ETFs have the potential to outperform their indexes. However, they aim to do so in a controlled and measured way—aiming for modest but consistent wins that add up over time, rather than placing large high-conviction bets. But just like with any type of investing, there is no guarantee that these active ETFs will beat their indexes, and it is also possible they could underperform.

Risk management

Negative market events often come seemingly out of nowhere, and can’t always be predicted by the data. That’s why it can be helpful to have the additional safeguard of a portfolio-management team providing daily oversight, who is monitoring and managing a wide variety of risks.

Non-biased approach

By relying on models to generate portfolio adjustments, such as which stocks to overweight and which to underweight, the portfolio-management process is steeped in objectivity. This helps provide a strong framework for meeting investment objectives consistently through time.

Constant innovation

Since the market is always evolving, the Enhanced ETF investment process incorporates ongoing review, testing, and updates. These enhancements may help to identify new sources of data that have the potential to continue to add value over time, although there is no guarantee of the effectiveness of new approaches.

Learn more

Investors interested in learning more can read more about ETFs, browse the full list of Fidelity ETFs, or search for ETFs that match their investment objective using Fidelity’s ETF Screener.

Below is a complete list of Fidelity’s enhanced ETFs, as of February 2025:

  • Fidelity® Enhanced US All Cap Equity ETF (
    )
  • Fidelity® Enhanced Large Cap Core ETF (
    )
  • Fidelity® Enhanced Large Cap Growth ETF (
    )
  • Fidelity® Enhanced Large Cap Value ETF (
    )
  • Fidelity® Enhanced Mid Cap ETF (
    )
  • Fidelity® Enhanced Small Cap ETF (
    )
  • Fidelity® Enhanced International ETF (
    )
  • Fidelity® Enhanced Emerging Markets ETF (
    )
  • Fidelity® Enhanced High Yield ETF (
    )

Investors can view top-10 holdings, performance data, and other information by looking up each ETF’s ticker symbol on Fidelity.com.

Find the right ETF for you

Use our screener to identify ETFs and ETPs that match your investment goals.

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More to explore

How to choose an ETF

It's all about knowing what to look for.
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Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus, an offering circular, or, if available, a summary prospectus containing this information. Read it carefully.

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses.
ETFs are subject to market volatility and the risks of their underlying securities which may include the risks associated with investing in smaller companies, foreign securities, commodities and fixed income investments. Foreign securities are subject to interest rate, currency- exchange rate, economic and political risk all of which are magnified in emerging markets. ETFs that target a small universe of securities, such as a specific region or market sector are generally subject to greater market volatility as well as the specific risks associated with that sector, region or other focus. ETFs which use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETF is usually different from that of the index it tracks because of fees, expenses and tracking error. An ETF may trade at a premium or discount to its Net Asset Value (NAV). The degree of liquidity can vary significantly from one ETF to another and losses may be magnified if no liquid market exists for the ETF’s shares when attempting to sell them. Each ETF has a unique risk profile which is detailed in its prospectus, offering circular or similar material, which should be considered carefully when making investment decisions.

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