Fidelity Blue Chip Growth ETF: More trouble ahead (BATS:FBCG)

Tero Vesalainen/iStock via Getty Images

Investment thesis

The Fidelity Blue Chip Growth ETF (BAT:FBCG) is a relatively new semi-actively managed ETF that took shareholders on a wild ride after its launch in June 2020. Performance since then has been disappointing, underperforming liability iShares S&P 500 Growth ETF (IVW) by 7.87% through May 4, 2022. I’ve looked at the reasons why, and it appears that fund managers have an above-average tolerance for risk, even when it comes to growth investing , and only tend to outperform when market sentiment is incredibly positive. Now that 2009 and 2020 are clearly in the rearview mirror and we are looking at higher interest rates, there is no reason to pay high fees for what is likely to be poor relative performance. I consider FBCG to be a sell, and throughout this article I will provide you with other growing alternatives for you to consider.

Performance history

FBCG may be a new launch, but the Fidelity Blue Chip Growth Fund (FBBGRX) has been operating since June 2000 and follows the same strategy with the same fund managers. I’ve replaced the returns with this old symbol to highlight performance versus IVW since June 2000. Overall the results are positive, showing an annualized outperformance of 1.09%, enough to offset the higher risk raised.

Performance History of FBCG vs. IVW

Portfolio Viewer

A closer look at the numbers reveals how FBCG is a mediocre fund most of the time, but outperforms dramatically in just a few years: 2009 and 2020, in particular, when it beat 13.82% and 28.22% . Excluding those years, GFCG has underperformed by an average of 0.30% per year from 2001 to 2021. GFCG may be a good candidate when markets bottom, but I’m not very confident that will be the case. Recession risks still exist even after Fed Chairman Powell struck an optimistic tone at Wednesday’s press conference.

Strategy and Fundamentals

In a nutshell, FBCG’s strategy is to invest in well-known, blue-chip companies that we can’t live without. A Baron’s article profiling one of the managers, Sonu Kalra, notes how he seeks “strong free cash flow, high returns on equity and the potential to double earnings over a three to five year period.”

Fidelity was one of the few companies in 2019 to gain approval for semi-transparent ETF offerings. Fund managers are not required to disclose their holdings on a daily basis, but rather offer a tracking basket to adequately represent performance. The aim is to protect a proprietary strategy and as of today the basket has a 76.46% weighting overlap with its actual holdings. Nevertheless, the fund published its monthly asset report as of March 31, 2022, which I will use to assess fundamentals.

There are dozens of large-cap growth ETFs available with average expense ratios of 0.28%. Each offers different combinations of value, growth, concentration and volatility, but GFCG is an extreme case. Consider these rankings out of the 29 in my database:

  • Price to forward earnings ratio: #22
  • Price/earnings ratio: #20
  • Price/cash ratio: #28
  • Price-to-sales ratio: #20
  • Five-year revenue growth rate: #1
  • Year-over-year forecast revenue growth rate: #1
  • Year-on-year EPS growth rate forecast: #1
  • Two-year market beta: #29
  • Five-year market beta: #29
  • % Assets in Top 10 Sectors: #23
  • % Assets in Top 20 Sectors: #20

This high level look suggests that GFCG is not a worthwhile investment unless you think the market will once again enter a phase of extreme market optimism where investors are happy to pay high premiums for stocks to high increase. Next, let’s take a look at its top 20 most recent holdings.

GFCG Top 20 Fundamental Holdings

Chart: The Sunday Investor; Data: In Search of Alpha

FBCG’s top 20 holdings total 67.31% and its top 20 industries total 87.45%. While undoubtedly concentrated, that’s to be expected for a category that includes a lot of mega-caps. To avoid this, you will need to drastically alter your growth objectives by choosing either the SoFi Select 500 (SFY) ETF or the Invesco S&P 500 GARP (SPGP) ETF. Although not explicitly stated, FBCG considers market caps in its selections. However, what is unique is its five-year market beta of 1.29, which reflects the high volatility levels of its constituents. The safest stocks still include some of its top holdings like Apple (AAPL), Microsoft (MSFT) and Alphabet (GOOGL, GOOG), but otherwise there is plenty of speculation.

Investors have largely looked beyond the extreme valuations of growth stocks over the past five years. Tesla (TSLA) is up over 1,500% but still has a forward P/E ratio of 76.60. Amazon (AMZN) is currently trading at 151.27 times forward earnings, but that’s after a substantial 27% drop in prices and a 77% reduction in earnings estimates over the past six months. The message is clear: if a stock has a high valuation and lacks sales and earnings or offers weak growth prospects, expect a steep decline. According to Search Yardeni, quarterly revenue surprises in the middle of the first quarter of 2022 are averaging 2.1%, its lowest level in two years. In turn, valuations are finally normalizing.

This reality is not good for aggressive growth ETFs like FBCG and its weighted average price-to-earnings ratio of 33.14. In contrast, IVW is at 29.45, and the Invesco S&P 500 Pure Growth ETF (RPG) is currently around 27x forward earnings and has a similar level of revenue growth, earnings growth and focus. in its top 20 sectors.

Investment recommendation

Historical returns and risk-adjusted returns show that FBCG is capable of producing alpha. However, all of its excess returns can be attributed to 2009 and 2020, when the US was just emerging from a recession and risk assets were strongly favored. An analysis of excess returns showed that most of the time FBCG underperformed or would have underperformed a passive alternative like IVW. As we have not entered a recession yet, it is not a suitable investment.

This year, the market favors low-value stocks and punishes high-growth companies that barely exceed (or fall short of) sales and earnings expectations. GFCG managers pick these kinds of high-risk stocks, and while it might work well in the long term, I think it’s a bad play in the short term. Therefore, I view FBCG as a sell and expect it to continue to underperform in 2022.

Comments are closed.