FVAL: A Value ETF Loaded With Growth Stocks — Balancing Diversification and Long-Term Outperformance

In the ever-evolving landscape of factor-based investing, the Fidelity Value Factor ETF (FVAL) stands out as a unique proposition. Designed to capture the essence of value investing while subtly incorporating growth-oriented exposure, FVAL offers investors a compelling blend of diversification and long-term outperformance potential. This article explores how the fund's multifactor strategy—targeting undervalued large-cap companies—creates a bridge between traditional value principles and the resilience of high-quality growth stocks, particularly in today's market environment.

The FVAL Strategy: Value-Driven, But Not Value-Exclusive

FVAL tracks the Fidelity U.S. Value Factor Index, which selects large- and mid-cap U.S. companies based on metrics like price-to-book, price-to-earnings, and free cash flow yield. These criteria are hallmarks of value investing, aiming to identify stocks trading below intrinsic value. However, the fund's portfolio reveals an unexpected twist: its top holdings include tech giants like Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA)—companies often categorized as growth stocks.

This inclusion is not a misstep but a reflection of shifting valuation dynamics. For example, even high-growth tech companies can appear undervalued when measured by free cash flow yield or price-to-book ratios, particularly during periods of market rotation. As of April 30, 2025, FVAL's Information Technology sector allocation stands at 29.19%, far exceeding the typical weighting in traditional value ETFs. This exposure to growth-heavy sectors introduces a layer of innovation and earnings resilience that traditional value strategies often lack.

Performance: A Hybrid Approach in Action

FVAL's historical performance underscores its ability to balance value and growth. Over the past five years, the fund has delivered a 15.07% annualized return, outperforming both the ETF Database Category Average (6.62%) and the FactSet Segment Average (6.74%). Its 1-year return of 10.10% places it in the upper echelon of its peers, despite the broader growth-led market environment.

This outperformance is partly attributable to its sector tilt. While traditional value ETFs often underweight technology, FVAL's exposure to high-quality tech stocks has allowed it to benefit from the sector's earnings momentum. For instance, Microsoft and Nvidia—both top 10 holdings—have consistently driven growth through cloud computing and AI innovation, even as their valuations have normalized. This hybrid approach mitigates the risk of relying solely on cyclical value sectors like industrials or energy, which can underperform during periods of economic uncertainty.

Diversification and Risk Management

FVAL's structure is designed to reduce concentration risk while maintaining a disciplined value orientation. The fund holds 132 securities, with the top 10 accounting for 36.59% of assets. While this level of concentration is higher than broad-market ETFs, it ensures a focused exposure to companies with strong fundamentals. Additionally, FVAL's semi-annual rebalancing and sector-weighting rules prevent overexposure to any single industry, aligning it with the broader market's composition.

From a risk perspective, FVAL exhibits a beta of 0.96 and a standard deviation of 16.59% over three years, indicating moderate volatility. This is particularly notable given its heavy Information Technology allocation, which typically carries higher volatility. The fund's ability to maintain stability while capturing growth-like returns is a testament to its value-centric methodology.

The Case for Long-Term Outperformance

Historical data on value and growth stocks reveals a cyclical pattern: growth stocks have outperformed in 14 of the last 20 years, including 8 of the past 10. However, value stocks have shown resilience in specific periods, such as January 2025, when the Morningstar US Value Index outperformed by 0.6 percentage points. FVAL's strategy is positioned to capitalize on these shifts.

A 2025 study on diversification with value and growth stocks over a five-year horizon found that combining the two styles can reduce downside risk for risk-averse investors. For instance, portfolios allocating 60% to value and 40% to growth stocks demonstrated lower shortfall risk and expected loss. FVAL's sector-neutral approach, with its mix of value and growth characteristics, aligns with these findings. By including high-quality growth stocks within a value framework, the fund mitigates the downside risks associated with pure-play value strategies while retaining the potential for long-term outperformance.

Investment Implications and Strategic Positioning

FVAL is not a standalone solution but a strategic building block for investors seeking a value tilt with growth resilience. Its 0.16% expense ratio and institutional-grade methodology make it an efficient alternative to active strategies. For those adopting a core-satellite approach, FVAL can complement broad-market ETFs like the S&P 500 while adding exposure to undervalued, high-quality companies.

However, investors should consider the broader economic context. While FVAL's value metrics have historically favored cyclical recovery, the current market environment—marked by AI-driven growth and low interest rates—may favor growth stocks. A diversified portfolio that includes FVAL alongside growth-oriented ETFs (e.g., XLK or VGT) can hedge against macroeconomic shifts while leveraging the strengths of both factors.

Conclusion: A Nuanced Path to Outperformance

The Fidelity Value Factor ETF challenges the conventional dichotomy between value and growth investing. By targeting undervalued large-cap companies—many of which are high-quality growth stocks—FVAL offers a unique blend of diversification and long-term potential. Its performance over the past five years, combined with a disciplined, rules-based approach, makes it a compelling option for investors seeking to balance risk and return in an increasingly dynamic market.

As the lines between value and growth continue to blur, FVAL exemplifies how factor-based investing can evolve to meet the needs of modern portfolios. For those willing to embrace its hybrid strategy, the fund represents a thoughtful, cost-effective way to capture the best of both worlds.