This is a small- and mid-cap multifactor ETF that tracks the Fidelity Small-Mid Multifactor Index. It screens the US small- and mid-cap universe and selects stocks by evaluating four factors together: valuation, quality, momentum, and low volatility.

It suits investors who want exposure to small and mid caps through a factor-based smart beta strategy rather than a plain market-cap-weighted passive ETF.

Launched by Fidelity in 2022, it is managed passively, tracking an index.

From the US small- and mid-cap universe, the ETF selects stocks that simultaneously meet the criteria of undervaluation, high quality, upward momentum, and relatively low volatility. By combining the four factors evenly, it provides diversified exposure without tilting toward any single factor, and it maintains broad diversification with roughly 600 holdings.

• Balanced combination of four factors reduces the risk of over-concentration in a single factor
• A low expense ratio eases the cost burden of pursuing factor premiums

Assets under management (AUM) stand at $2.5B, and the expense ratio is 0.15% per year.

Compared with similar multifactor ETFs such as JHMM and FNDX, it offers more specialized exposure to small and mid caps, and its fees are low relative to the category average.

Small- and mid-cap factor strategies tend to show large swings in relative returns versus large caps, depending on the interest rate environment and the economic cycle. Because the structure combines quality and momentum factors, it has at times shown somewhat stronger defensiveness than a pure small- and mid-cap index during economic slowdowns.

Demand for smart beta has remained steady across the factor ETF market, and inflows tend to increase when the valuation appeal of small and mid caps comes into focus. Fidelity's low-fee policy has served as a backdrop for long-term inflows.

Its strengths are the balanced combination of four factors and low fees, while its weaknesses are the higher volatility and liquidity constraints inherent to small and mid caps.

FNDX and FNDA, shown in the table, are fundamentally weighted ETFs managed by Fidelity. Their strategic direction differs, but they belong to the same asset manager's smart beta lineup. PRF is a large-cap fundamentally weighted ETF, and JHMM is John Hancock's multifactor ETF, which pursues a similar factor strategy in the small- and mid-cap space. As additional options that serve as more direct substitutes, you can also consider INTF, iShares' multifactor ETF, and SMLV, Invesco's factor ETF.

Here are the points to review before investing in FSMD. With small- and mid-cap factor ETFs, you need to consider the market cycle and the environment for factor performance together, and you should also check costs, liquidity, and exchange rate factors in advance.

Given the nature of small and mid caps, drawdowns can be large and liquidity can thin during sharp market declines. Factor strategies go through cycles in which they underperform market-cap-weighted indexes in certain market phases, so they should be evaluated over a long time horizon.

For investors interested in small- and mid-cap factor investing, the low fees and balanced factor composition are advantages. If you simply want to track a small- and mid-cap index, a market-cap-weighted small- and mid-cap ETF is suitable, while FSMD or JHMM is a better fit if you want factor diversification.