Factor Investing. Fundamentals for Investors. Not FDIC Insured May Lose Value No Bank Guarantee

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1 Factor Investing Fundamentals for Investors Not FDIC Insured May Lose Value No Bank Guarantee

2 As an investor, you have likely heard a lot about factors in recent years. But factor investing is not new. While the term itself is now more common, this investing approach has been used by active managers for decades. Learn more about factors including what they are, the ones used most frequently and why taking a factor-based investing approach may help you achieve your investment goals. Not FDIC Insured May Lose Value No Bank Guarantee

3 What Is Factor Investing? Factor investing involves building portfolios based on identifying specific drivers of risk and returns. There are two major types of factors: Macroeconomic factors Broad economic indicators that influence asset class returns. Style factors Characteristics of individual securities that have historically driven long-term risk and returns. The evolution of factors The first factor model was developed in the 1960s. Since then, academics and practitioners have discovered other factors and exposures that are also important drivers of a security s price. Market Risk Style and Size Assorted Risk and Return Factors The original factor model demonstrated investment returns were driven by the most basic factor: market risk, or beta. 1 Researchers extended that first model to account for additional factors: size and style. 2 Continued research showed that many other strategic factors, such as momentum, quality, value, volatility, and yield, can help explain components of a stock s return. 1 Capital Asset Pricing Model (CAPM). A model that describes the relationship between systematic risk and expected return for assets, particularly stocks. 2 Fama and French Model. Research conducted by Eugene Fama and Kenneth French demonstrated that, besides the market factor, the size of a company and its valuation are also important drivers of its security price. 3

4 Getting to Know Factors Investors might consider a factor-based approach to building portfolios when seeking excess returns, more control over risk exposures, or specific investment outcomes. Mutual fund managers have been employing factors for decades. Most recently, style and macroeconomic factors are being employed in exchange traded funds (ETFs), an increasingly popular investment vehicle. Common style factors These factors are frequently used to help characterize a security and distinguish it from its peers. Low Volatility This factor targets securities with lower risk than the broader market. They have historically resulted in higher risk-adjusted returns and may help investors stay the course during periods of market volatility. Momentum These are securities with improving fundamentals that have recently outperformed, and may continue to do so over the medium term. Dividends While not historically considered factors, factor-investing principles can also be applied to securities that provide dividends. For example, investing in companies that pay higher dividends may offer greater income potential, and higher-yielding companies with positive correlations to Treasury yields may provide protection when interest rates are rising. Quality The quality factor targets securities with higher profitability, more stable income and cash flows, a lack of excessive leverage, or better credit quality. These securities tend to be more profitable, generate higher earnings, and introduce less risk. Value Lower cost, undervalued securities as compared to their intrinsic value. Less expensive securities that can beat expectations may afford investors more upside. Carry Carry represents the tendency of securities with higher yields to provide superior returns over time. Diversification and asset allocation do not ensure a profit or guarantee against loss. 4

5 Common macroeconomic factors These factors are broad, market-related risks that can influence asset class returns. Inflation Because higher inflation reduces the purchasing power on the coupon payments of fixed-rate bonds, investors can earn higher returns for taking on the risk that inflation could rise. Interest Rates Investors can earn higher returns for taking on the risk that interest rates could rise. Credit There is the potential for higher yield when investors take on a certain level of default risk when lending to companies by buying bonds. Macroeconomic Factors for Diversification Just as diversification across asset classes can yield important benefits, diversification across macroeconomic factors can enhance a portfolio s returns and mitigate risks. For instance, interest rate and credit exposure are key drivers of fixed income risk and returns that tend to reward investors at different times. Rate exposure tends to benefit investors during economic downturns when uncertainty is high, while credit exposure tends to outperform when growth is strong. Because these returns have historically been negatively correlated, combining these exposures may result in a more diversified portfolio. What to consider when choosing a factor-based investment: How the factor is defined and measured. Multiple definitions and metrics can be used; performance can vary as a result. For instance, the value factor within equities might be measured by earnings, sales, or cash flows. How the investment managers choose and maintain securities. A group of securities composes the overall investment; each one should be selected to maximize exposure to the desired factor and minimize unintended exposures. And methods for weighting and rebalancing should ensure that the investment adheres to its intended factor exposure. The business cycle. Most well-known factors tend to outperform in specific business-cycle phases; as a result, they may pay off at different times. Because factors are cyclical, they can sometimes underperform, too. For example, swift changes in market direction can disrupt momentum strategies as in 2009, following the rapid recovery from the financial crisis. 5

6 Factors and Asset Classes The merits of factors span across asset classes. A factor-based investment approach can provide sources of outperformance, risk mitigation, and diversification not only within equities, where these concepts have been broadly applied, but within the fixed income markets as well. Style Factors and Equity Research reveals the return potential of the value, quality, momentum, and low volatility factors over time in both domestic and international equity markets. These common style factors have outperformed the broader market over time. Domestic Equity: Cumulative Factor Returns vs. the Market, International Equity: Cumulative Factor Returns vs. the Market, % 7000% Value 8000% 7000% 6000% 5000% 4000% 3000% 2000% 1000% 0% Quality Momentum Low Volatility Russell % 5000% 4000% 3000% 2000% 1000% 0% Value Momentum Quality Low Volatility MSCI World ex US Dec-85 Dec-87 Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-85 Dec-87 Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Returns are cumulative and assume reinvestment of dividends. Returns do not reflect the performance of any Fidelity index or ETF. Past performance is no guarantee of future results. Russell 1000 Index (left chart); MSCI World ex U.S. Index (right chart). Value composite is a combined average ranking of stocks in the equal-weighted top quintile (by book/price ratio) and stocks in the equal-weighted top quintile (by earnings yield) of the indices noted. Momentum returns are the equal-weighted top quintile (by trailing 12-month returns) of the Russell 1000 Index. Quality returns are the equal-weighted top quintile (by return on equity) of the indices noted. Low-volatility returns are yearly returns of the equal-weighted bottom quintile (by standard deviation of weekly price returns) of the indices noted. For more detail, see September 2016 Fidelity Leadership Series An Overview of Factor Investing. Source: Fidelity Investments as of 6/30/17. 6

7 Style Factors and Fixed Income Style factors play an important role in driving the risk and return profiles of bonds. For example, investmentgrade portfolios have benefited from the superior risk-adjusted returns of the value, low volatility, and carry factors, while high-yield portfolios have benefited from the value, momentum, quality, and low volatility factors. Investment-Grade Markets: style factor risk-adjusted return Benchmark Value Momentum Quality Low Volatility Carry Past performance is no guarantee of future results. Period studied: Jan through Dec Returns are annualized. Risk: volatility, as measured by standard deviation. Index: Bloomberg Barclays Aggregate Bond Index. Value: securities in the top quintile based on option-adjusted spread of the corporate subset of the Index, controlling for credit rating and duration. Quality: securities with a credit rating of A or better within the corporate subset of the Index, controlling for duration. Momentum: favoring securities with the greatest spread tightening based on 3-month percent option-adjusted spread change within the corporate subset of the Index, controlling for duration. Low-volatility: securities within the 1 5 year bucket of the corporate subset of the Index. Carry: securities in the top quintile based on yield within the corporate subset of the Index, controlling for duration. Source: Bloomberg Finance L.P., Fidelity Investments, as of Dec. 31, High-Yield Markets: style factor risk-adjusted return Benchmark 0.78 Value Momentum Quality Low Volatility Carry Past performance is no guarantee of future results. Period studied: Jan through Dec Returns are annualized. Risk: volatility, as measured by standard deviation. index: BofA ML High Yield Constrained Index. Value: securities in the top quintile based on option-adjusted spread/leverage (as measured by total debt outstanding/earnings before interest, taxes, Quality: securities with a credit rating of BB- or better within the Index. Momentum: securities in the bottom quintile based on 3-month relative option-adjusted-spread momentum within the Index. Low-volatility: securities in the bottom quintile based on duration times spread (DTS) within the Index. Carry: securities in the top quintile based on option-adjusted spread within the Index. Source: Bloomberg Finance L.P., Fidelity Investments, as of Dec. 31,

8 Fidelity Factor ETFs Our equity factor ETFs and the Fidelity Low Duration Bond Factor ETF (FLDR) are self-indexed smart beta ETFs. Active in design, and passive in implementation, their index rules are constructed to provide exposure to certain types of securities. Once the indexes are built, the funds are passively managed, seeking to mirror their indexes. Fidelity High Yield Factor ETF (FDHY) uses value and quality factors with a rules-based approach to select bonds with strong return potential and a low probability of default. Active security selection helps to optimize trading and reduce transaction costs. Equity Symbol Expense Ratio Fidelity Dividend ETF for Rising Rates Targets higher-yielding companies with positive correlation to Treasury yields, which can provide protection in a rising rate environment. FDRR 0.29% Fidelity High Dividend ETF Seeks to deliver higher yield through exposure to higher relative dividend yield with sector tilts, subject to constraints. FDVV 0.29% Fidelity Low Volatility Factor ETF Offers the potential for returns similar to the broader market over time, with less volatility. FDLO 0.29% Fidelity Momentum Factor ETF Examines price trends to identify companies that may outperform over the medium term, since these stocks may be more likely to continue performing well. FDMO 0.29% Fidelity Quality Factor ETF Looks for companies with higher profitability, stable cash flows, and good balance sheets, because these stocks tend to outperform peers over time. FQAL 0.29% Fidelity Value Factor ETF Targets stocks with low prices relative to fundamentals, since they have historically outperformed the market over time. FVAL 0.29% Fidelity International High Dividend ETF Seeks to deliver higher yield through exposure to higher relative dividend yield with sector tilts, subject to constraints. FIDI 0.39% Fidelity International Value Factor ETF Targets stocks with low prices relative to fundamentals, since they have historically outperformed the market over time. FIVA 0.39% Fixed Income Symbol Expense Ratio Fidelity Low Duration Bond Factor ETF Optimizes the balance of interest rate risk and credit risk such that both returns and risk measures may be improved relative to traditional U.S. investment-grade floating rate note indices. FLDR 0.15% Fidelity High Yield Factor ETF Seeking attractively priced, high-yield bonds with low probability of default within a higher credit quality universe (BB and B rated). FDHY 0.45% Expense ratios as of 6/14/18. 8

9 Ask your advisor for more information about evaluating factor investments and which strategies may be right for you. Terms to Know Active management A strategy in which professional fund managers or investment research teams decide which securities to buy, hold, or sell based on analysis, research, and their judgment. Beta A measure of risk. It represents how a security has responded in the past to movements of the securities market. Business cycle The upward and downward cyclical movements of the economy. Starting with slow growth that accelerates to a peak, the market then declines, typically into recession. Exchange Traded Fund (ETF) An ETF is a basket of securities that you can buy or sell on an exchange. In contrast to mutual funds, ETFs can be bought and sold throughout the day with holdings published daily. 3 Expense ratio An annualized figure that reflects amounts reimbursed by Fidelity or reductions from brokerage service or other expense offset arrangements, if any, and is updated as the annual or semiannual information is available. Index A measurement of the value of a group of stocks selected to represent a portion of the overall market. Market exposure The amount of money invested in a particular sector or asset class. Passive management Professional fund managers or investment research teams choose securities based on the holdings of a specific index. Because the fund holdings duplicate the index, less manager oversight is needed. Risk-adjusted return A measure that indicates how much return an investment will provide given the level of risk associated with it. Smart beta An investment strategy that uses criteria other than market capitalization (the size of a company as measured by its shares total market value) to weight its holdings. Smart beta s underlying assumption is that a market capitalization-weighted index can be outperformed if securities are selected and weighted according to other attributes, including factors. 3 Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund. ETFs are subject to market fluctuation, the risks of their underlying investments, management fees, and other expenses. ETFs are subject to short-term trading fees by Fidelity if held for less than 30 days.

10 IMPORTANT INFORMATION Fidelity High Dividend ETF developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. The securities of smaller, less well-known companies can be more volatile than those of larger companies. There is no guarantee that a factor-based investing strategy will enhance performance or reduce risk. Before investing, make sure you understand how the fund s factor investment strategy may differ from more traditional index funds. Depending on market conditions, fund performance may underperform compared to funds that seek to track a market capitalization-weighted index. 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). There can be no assurance that an active trade market will be maintained and trading may be halted due to market conditions. Fidelity Dividend ETF for Rising Rates developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. The securities of smaller, less well-known companies can be more volatile than those of larger companies. There is no guarantee that a factor-based investing strategy will enhance performance or reduce risk. Before investing, make sure you understand how the fund s factor investment strategy may differ from more traditional index funds. Depending on market conditions, fund performance may underperform compared to funds that seek to track a market capitalization-weighted index. 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). There can be no assurance that an active trade market will be maintained and trading may be halted due to market conditions. Fidelity Low Volatility Factor ETF developments. The securities of smaller, less well-known companies can be more volatile than those of larger companies. There is no guarantee that a factor-based investing strategy will enhance performance or reduce risk. Before investing, make sure you understand how the fund s factor investment strategy may differ from more traditional index funds. Depending on market conditions, fund performance may underperform compared to funds that seek to track a market capitalization-weighted index. 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). There can be no assurance that an active trade market will be maintained and trading may be halted due to market conditions. Fidelity Momentum Factor ETF developments. The securities of smaller, less well-known companies can be more volatile than those of larger companies. There is no guarantee that a factor-based investing strategy will enhance performance or reduce risk. Before investing, make sure you understand how the fund s factor investment strategy may differ from more traditional index funds. Depending on market conditions, fund performance may underperform compared to funds that seek to track a market capitalization-weighted index. 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). There can be no assurance that an active trade market will be maintained and trading may be halted due to market conditions. Fidelity Quality Factor ETF developments. The securities of smaller, less well-known companies can be more volatile than those of larger companies. There is no guarantee that a factor-based investing strategy will enhance performance or reduce risk. Before investing, make sure you understand how the fund s factor investment strategy may differ from more traditional index funds. Depending on market conditions, fund performance may underperform compared to funds that seek to track a market capitalization-weighted index. 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). There can be no assurance that an active trade market will be maintained and trading may be halted due to market conditions. Fidelity Value Factor ETF developments. The securities of smaller, less well-known companies can be more volatile than those of larger companies. Value stocks can perform differently than other types of stocks and can continue to be undervalued by the market for long periods of time. There is no guarantee that a factor-based investing strategy will enhance performance or reduce risk. Before investing, make sure you understand how the fund s factor investment strategy may differ from more traditional index funds. Depending on market conditions, fund performance may underperform compared to funds that seek to track a market capitalization-weighted index. 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). There can be no assurance that an active trade market will be maintained and trading may be halted due to market conditions. Fidelity International High Dividend ETF developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. The securities of smaller, less well-known companies can be more volatile than those of larger companies. There is no guarantee that a factor-based investing strategy will enhance performance or reduce risk. Before investing, make sure you understand how the fund s factor investment strategy may differ from more traditional index funds. Depending on market conditions, fund performance may underperform compared to funds that seek to track a market capitalization-weighted index. 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). Given the nature of the relevant markets for certain of the fund s securities, shares may trade at a larger premium or discount to the NAV than shares of other ETFs as well as become less liquid in stressed market conditions. There can be no assurance that an active trade market will be maintained and trading may be halted due to market conditions. 10

11 Fidelity International Value Factor ETF developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. The securities of smaller, less wellknown companies can be more volatile than those of larger companies. Value stocks can perform differently than other types of stocks and can continue to be undervalued by the market for long periods of time. There is no guarantee that a factor-based investing strategy will enhance performance or reduce risk. Before investing, make sure you understand how the fund s factor investment strategy may differ from more traditional index funds. Depending on market conditions, fund performance may underperform compared to funds that seek to track a market capitalization-weighted index. 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). Given the nature of the relevant markets for certain of the fund s securities, shares may trade at a larger premium or discount to the NAV than shares of other ETFs as well as become less liquid in stressed market conditions. There can be no assurance that an active trade market will be maintained and trading may be halted due to market conditions. Fidelity Low Duration Bond Factor ETF In general the bond market, especially foreign markets, are volatile, and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible. Securities with floating interest rates can be less sensitive to interest rate changes than securities with fixed interest rates, but may decline in value if their interest rates do not rise as much, or as quickly, as interest rates in general. Leverage can increase market exposure and magnify investment risk. There is no guarantee that a factor-based investing strategy will enhance performance or reduce risk. Before investing, make sure you understand how a factor investing strategy may differ from a more traditional index-based or actively managed approach. Depending on market conditions, factor-based investments may underperform compared with investments that seek to track a market capitalizationweighted index or investments that employ full active management. The fund generally expects to effect its creations and redemptions for cash rather than in-kind securities, and may recognize more capital gains and be less tax-efficient than if it were to redeem in-kind. 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). There can be no assurance that an active trade market will be maintained and trading may be halted due to market conditions. Fidelity High Yield Factor ETF In general the bond market, especially foreign markets, are volatile, and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible. Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which may be magnified in emerging markets. Leverage can increase market exposure and magnify investment risk. Securities selected using quantitative analysis can perform differently from the market as a whole as a result of the factors used in the analysis, the weight placed on each factor, and changes in the factors historical trends. There is no guarantee that a factor-based investing strategy will enhance performance or reduce risk. Before investing, make sure you understand how a factor investing strategy may differ from a more traditional index-based or actively managed approach. Depending on market conditions, factor-based investments may underperform compared with investments that seek to track a market capitalization-weighted index or investments that employ full active management. The fund generally expects to effect its creations and redemptions for cash rather than in-kind securities, and may recognize more capital gains and be less tax-efficient than if it were to redeem in-kind. An ETF may trade at a premium or discount to its Net Asset Value (NAV). There can be no assurance that an active trade market will be maintained and trading may be halted due to market conditions.

12 Contact your financial advisor today. Not NCUA or NCUSIF insured May Lose Value No Credit Union Guarantee Unless otherwise disclosed to you, in providing this information, Fidelity is not undertaking to provide impartial investment advice, act as an impartial adviser, or to give advice in a fiduciary capacity. Beta is a measure of risk. It represents how a security has responded in the past to movements of the securities market. Smart beta represents an alternative investment methodology to typical cap-weighted benchmark investing and there is no guarantee that a smart beta or factor-based investing strategy will enhance performance or reduce risk. Investment decisions should be based on an individual s own goals, time horizon, and tolerance for risk. Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer, accountant, or other advisor before making any financial decision. Third-party trademarks and service marks are the property of their respective owners. All other trademarks and service marks are the property of FMR LLC or an affiliated company. Investing involves risk, including risk of loss. Past performance is no guarantee of future results. Before investing, consider the mutual fund s or exchange traded product s investment objectives, risks, charges, and expenses. Contact Fidelity or visit institutional.fidelity.com for a prospectus or, if available, a summary prospectus containing this information. Read it carefully FIDELITY INVESTMENTS INSTITUTIONAL SERVICES COMPANY, INC., 500 SALEM STREET, SMITHFIELD, RI FIAM-BD 0618