FACTOR INVESTING:

FOR INVESTOR USE

Targeting your investment needs

John Gagliano

Senior Manager

Sector & ETF Investment Strategy

Table of Contents

2 FOR INVESTOR USE

• Introduction

• What is factor investing?

• How to use factors in a portfolio

• Fidelity Factor ETFs

• Tools and Resources

The 1980’s

Source: Morningstar, Average Annualized Return S&P 500 Index January 1st 1980 to December 31, 1989

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17%

The 1990’s

Source: Morningstar, Average Annualized Return S&P 500 Index January 1st 1990 to December 31, 1999

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18%

The 2000’s

Source: Morningstar, Average Annualized Return S&P 500 Index January 1st 2000 to December 31, 2009

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-1%

The first half of the 2010s

Source: Morningstar, Average Annualized Return S&P 500 Index January 1st 2010 to December 31, 2015

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13%

Dilemma for Investors

7 FOR INVESTOR USE

• Historical returns tell us that nothing is certain in the equity

markets

• Will traditional investing styles be as effective in the current market

environment?

• Will moving to a conservative bond focused portfolio in retirement

deliver enough income in a low interest rate environment?

Overview of Factor Investing

8 FOR INVESTOR USE

What Are Style Factors?

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or

economic 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 investing strategy may differ from that of a more

traditional index product. Depending on market conditions, funds may underperform compared with products that seek to track a more traditional index.

The return of an index exchange-traded fund (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).

Source: Fidelity Investments.

FOR INVESTOR USE 9

FACTOR INVESTING INVOLVES Identifying securities with certain common characteristics, based on the idea that all securities have some level of sensitivity to the movement of the broader market.

Low Volatility Quality Momentum Value Dividends Size

Securities generating

returns comparable to the

broader market with less

volatility.

Securities with higher

profitability, more stable

income and cash flows,

and a lack of excessive

leverage.

Outperforming stocks that

have a tendency to

continue to outperform

over the medium term.

Inexpensive stocks with

low prices relative to their

fundamental value.

While not historically

considered factors, factor-

investing principles can

also be applied to certain

characteristics of income-

producing (or dividend)

securities, such as

dividend income potential

or protection when rates

are rising.

Publicly traded

companies are

typically grouped into

three different market cap

categories: large cap, mid

cap, and small cap.

What Are Macro Factors?

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or

economic 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 investing strategy may differ from that of a more

traditional index product. Depending on market conditions, funds may underperform compared with products that seek to track a more traditional index.

The return of an index exchange-traded fund (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).

Source: Fidelity Investments.

FOR INVESTOR USE 10

FACTOR INVESTING INVOLVES

Broad economic indicators that influence asset class returns.

Inflation Interest Rates Credit

Because higher inflation reduces the

purchasing power on the coupon payments of

fixed-rate bonds, investors can potentially earn

higher returns for taking on the risk that

inflation could rise.

Investors can potentially earn higher returns for

taking on the risk that interest rates could rise.

There is the potential for higher yield when

investors take on a certain level of default risk

when lending to companies by buying bonds.

Evolution of Factor Analysis

Progression of research into the drivers of asset returns

SINGLE SOURCE OF

SYSTEMATIC RISK

Capital Asset Pricing Model (CAPM) proposes

return on investment driven by exposure to

single factor, market risk, or “beta.”

Market

Asset Specific

Market

Asset Specific

Size

Style

Market

Asset Specific

Size

Style

PORTFOLIO PORTFOLIO PORTFOLIO

Style Factors Quality

Value

Momentum

Yield

Macro Factors Credit

Inflation

Real Interest Rates

MULTIPLE SYSTEMATIC

RETURN ANOMALIES

Fama and French develop model accounting

for additional factors; security characteristics of

size and style, which also drive performance.

ASSORTED STRATEGIC

RISK AND RETURN FACTORS

Substantial research and analysis into many

other strategic factors, which can be used to

explain the components of a security’s return.

11 FOR INVESTOR USE

Factors Matter Research reveals the return potential of these factors over time

Left: chart represents style factor performance in domestic equity. 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. 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 Russell 1000 Index. 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 Russell 1000 index. Low-volatility returns are yearly returns of the equal-weighted bottom

quintile (by standard deviation of weekly price returns) of the Russell 1000 Index. For more detail, see September 2016 Fidelity Leadership Series “An Overview of Factor Investing.”

Right: for illustrative purposes only. Does not represent the return of any specific asset class.

Source: Fidelity Investments, as of 6/30/17

Style factors demonstrate potential

to enhance returns

CUMULATIVE FACTOR RETURNS VS.

THE MARKET, 1985–2017

0%

1000%

3000%

2000%

4000%

5000%

6000%

7000%

8000%

9000%

De

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5

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c-1

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c-1

5

Russell 1000

Momentum

Quality

Low Volatility

Value

Inflation-

Protected

Bonds

Treasury

Bonds

Corporate

Bonds

Macro factors can help explain

returns across asset classes

Real Interest Rate Inflation Credit Economic Growth

12 FOR INVESTOR USE

Equities

Key Uses of Factor Strategies in a Portfolio

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Investors seek out factor exposures for return/outcome potential and risk management

INTENDED OBJECTIVES

Enhanced Returns Risk Management Targeted Outcome

Improve long-term performance with

lower costs

Complement or diversify portfolio

to reduce risk

Support investment objectives such as

income or low volatility

Fidelity Factor ETFs

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Factor Analysis within Fidelity’s Investment Approach

Factor analysis is a key part of our investment management processes and philosophies

Peter Lynch, 1968

Source: Fidelity Investments.

FOR INVESTOR USE 15

Fidelity Factor ETFs Focus on fundamental investment opportunities, leveraging our insights to define our factor-

based strategies in domestic and international markets

Fidelity Brokerage Trading Fees: Commission Free

Free commission offer applies to online purchases of Fidelity ETFs in a Fidelity brokerage account. The sale of ETFs on Fidelity’s brokerage platform

are subject to an activity assessment fee (of between $0.01 to $0.03 per $1000 of principal) by Fidelity.

FDRR Fidelity Dividend ETF

for Rising Rates

Targeting higher yielding companies with

positive correlation to rising Treasury

yields may provide protection in a rising

rate environment

FIDI Fidelity International

High Dividend ETF

FDVV Fidelity High

Dividend ETF

Aiming to generate higher relative dividend yield with

sector tilts, subject to constraints, which have historically

delivered higher yield

FLDR Fidelity Low Duration Bond Factor ETF Aims to optimize 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.

FQAL Fidelity Quality Factor ETF

Prioritizing companies with higher

profitability, stable cash flows and good

balance sheets which have tended to

outperform their peers over time

FIVA Fidelity International

Value Factor ETF

FVAL Fidelity Value

Factor ETF Pursuing cheap stocks, with low prices relative to

fundamentals, which have historically outperformed the

market over time

FDMO Fidelity Momentum

Factor ETF

Seeking outperforming stocks, which

historically had a tendency to continue

to outperform over the medium-term

FDHY 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).

FDLO Fidelity Low Volatility

Factor ETF

Focusing on securities, which

generate similar returns as the

broader market over time with

less volatility

Purchase Information

Source: Fidelity Investments.

FOR INVESTOR USE 16

Net Expense Ratio:

FDVV | FDRR | FDLO | FDMO | FQAL | FVAL 0.29%

FIDI | FIVA 0.39%

FDHY 0.45%

FLDR 0.15%

% Weight in Top 10 Max Active Weight

Fidelity’s Differentiated Approach to Factors and Equity

$97.6B

$78.3B

Weighted Average Market Cap

Low Volatility Indexes

23.5%

1.7%

38.7%

6.2% 3.4% M

SC

I

S&

P

Russell

1000

Index

Fid

elit

y

$152.4B

27.5%

Source: FactSet and Fidelity Investments as of 12/31/17.

FOR INVESTOR USE 17

Value Indexes

Thoughtful portfolio construction approach coupled with Fidelity’s fundamental insights is

designed to give targeted exposure with fewer unintended risks FACTOR SELECTION

Unique factor selection at the foundation of these products leverages the fundamental insights

of Fidelity’s investment management capabilities

SIZE A weighted-average market cap

consistent with benchmark maintains

neutral size exposure

SECURITY Equal-active weighting aimed at

avoiding both asset-specific risk and

high portfolio concentration

MS

CI

CR

SP

Fid

elit

y

$174.3B

Low Volatility indexes include Fidelity U.S. Low Volatility Factor Index, MSCI USA Minimum Volatility Index, S&P 500 Low Volatility Index; Momentum

indexes include Fidelity U.S. Momentum Factor Index, Dorsey Wright Technical Leaders, MSCI USA Momentum Index; Value indexes include Fidelity

U.S. Value Factor Index, MSCI USA Enhanced Value Index, CRSP US Large Cap Value Index; International Dividend indexes include Fidelity

International High Dividend Index, Dow Jones EPAC Select Dividend Index, S&P International Dividend Opportunities Index. Sector weightings and

max active weights are measured relative to the Russell 1000 Index. Country weightings are measured relative to the MSCI World ex USA Index.

GEOGRAPHY Country and regional awareness in

portfolio construction to avoid

geographic biases

International Dividend Indexes

Country Fidelity Dow Jones S&P

Japan -5% -22% -15%

United Kingdom 3% 8% -3%

France 2% 1% -7%

Germany -1% -7% -2%

Canada 0% -2% 6%

Switzerland -2% -3% 3%

Australia 2% 9% 5%

Netherlands -1% -2% -3%

Hong Kong -1% 0% 4%

Spain 2% 2% 2%

Other 2% 17% 11%

Country Active

Share

16% 38% 35%

SECTOR Sector neutral portfolio

prevents large sector biases

Momentum Indexes

Sector Fidelity Dorsey

Wright

MSCI

Discretionary 0% 4% 1%

Staples 0% -6% -8%

Energy 0% -6% -6%

Financials 0% -4% 11%

Health Care 0% 1% -1%

Industrials 0% 8% 2%

Tech 0% 2% 9%

Materials 0% 1% -2%

Real Estate 0% 1% -3%

Telecom 0% -2% -1%

Utilities 0% 0% -3%

Sector Active

Share

1% 18% 24%

Fidelity’s Differentiated Approach to Factors and High Yield A focus on the most impactful factors combined with Fidelity’s liquidity management and trading

experience seeks to deliver strong risk-adjusted returns

• Flexibility allows investment in new

issues, substitution of bonds within the

names and unnecessary turnover

• Seeks to minimize performance drag

caused by high transaction costs and

illiquidity

• Goal is to more closely replicate the

return and risk profile of the quantitative

model

LIQUIDITY Higher credit quality focus avoids CCC-rated

bonds and provides a better liquidity profile

VALUE & QUALITY A value and quality factor-weighted approach favors

bonds that we believe have a better historical risk-

reward profile than the broad high yield market

0 0 0 1 ll

Russe I

x e d n

TRADING OPTIMIZATION Active management structure minimizes

performance drag due to high transaction costs

Total Return

10.6%

7.3%

8.8% 9.1%

Risk (Std Dev)

January 2003–December 2017 (annualized)

Valu

e P

ort

folio

Hig

h Y

ield

Mark

et

Qualit

y P

ort

folio

Hig

h Y

ield

Mark

et

0.92 0.98 1.02 0.97 1.01 1.11 1.18

1.29

1.51

Last 7 Years 5/13– 7/13

12/15– 2/16

U.S. High Yield Average Bid/Ask Spread (pts.)

Charts are for illustrative purposes and do not reflect the performance or liquidity profile of any Fidelity ETFs.

Past performance is no guarantee of future results. Period studied for “Value & Quality” charts: Jan. 2003 through Dec. 2017. Returns are annualized.

Risk: Volatility, as measured by standard deviation. High-Yield Value Portfolio: Securities in the top quintile based on option-adjusted spread/leverage

(as measured by total debt outstanding/earnings before interest, taxes, debt, and amortization) of the Bank of America Merrill Lynch (BofA ML) High

Yield Constrained Index. High-Yield Quality Portfolio: Securities with a credit rating of BB- or better within the BofA ML High Yield Constrained Index.

Source: Bloomberg Finance L.P., Fidelity Investments, and BofA Merrill Lynch Global Research as of 5/31/18.

FOR INVESTOR USE 18

Fidelity’s Differentiated Approach to Factors and Investment Grade A rules-based process to optimize the balance of interest rate risk and credit risk such

that both return and risk measures may be improved relative to traditional benchmarks

• The rules-based, passive investment

process enables us to offer FLDR at a

highly competitive fee of 15 bps

• The performance index is a blend of two

components: the U.S. Investment Grade

Floating Rates Notes (FRN)

< 5-Years and the U.S. Treasury Notes 7

to 10-Years

• The fund’s portfolio provides the potential

for increased liquidity and reduced

turnover relative to traditional benchmarks

HIGH QUALITY

The fund invests exclusively in investment

grade issuers and U.S. Treasury notes

PERFORMANCE Optimized mix of credit and interest rate factors

provides the potential for highly competitive yields

and returns

INVESTMENT PROCESS

Active in design, utilizing fundamental insights

within a passive investment process

Efficient Frontier

Data from 10/2003–3/2018)

Total Returns (Annual)

Credit Quality

Past performance is no guarantee of future results.

Source: Bloomberg Finance L.P., Fidelity Investments. Source of Median Portfolio: Morningstar, Ultrashort Bond Category, as of 12/31/17. Credit Quality data

as of 5/31/18. Median Portfolio represents the median credit quality of mutual funds and ETFs within the Morningstar Ultrashort Bond Category after excluding

four passive strategies that are benchmarked to US Treasury indices (SHV, BIL, CLTL, BIL) SPDR® Blmbg Barclays 1-3 Mth T-Bill ETF, Goldman Sachs

Treasury Access 0-1 Year ETF, iShares Short Treasury Bond ETF and Invesco Treasury Collateral ETF. The Fidelity Low Duration Investment Grade Factor

Index credit quality derived from Bloomberg composite rating.

Median Portfolio of Ultra-Short Bond

Category

Fidelity Low Duration Investment Grade

Factor Index

Non-IG BBB A or Better 5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0% 1.0% 3.0% 5.0% 7.0%

Risk (Annualized Volatility)

FRN

Treasury

weight = 100%

19 FOR INVESTOR USE

70% 81%

15%

19% 15%

ETF Research Center Learn more about Exchange Traded Funds

Research > ETFs

Source: Fidelity.com

For illustrative purposes only

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There when you need it—embedded

education in the screener to help along

the way.

Just a click away

from results!

ETF/ETP Screener

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Two ways to get started:

• Build your own screen

• Select a theme that best describes what you’re looking for

Research > ETFs > ETF Screener

Source: Fidelity.com

For illustrative purposes only

Read more about

the theme to

understand what is

included as well as

excluded.

Look for the

commission-free icon

Read the Theme

Criteria to learn why a

symbol is included in

the results.

ETF/ETP Screener

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Source: Fidelity.com

For illustrative purposes only

Print, download, and save your results

Glossary

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Term Definition

Information Ratio Measures a fund's active return (fund's average monthly return minus the benchmark's average monthly return) in

relation to the volatility of its active returns

Market Capitalization The total dollar market value of all of a company’s outstanding shares.

Payout Ratio A measure of trailing dividends per share over the past twelve months divided by earnings per share.

Price-to-Book (P/B) Ratio The ratio of a company's current share price to reported accumulated profits and capital.

Price-to-Cash Flow (P/CF) Ratio The ratio of a company's current share price to its trailing 12-months cash flow per share.

Price-to-Earnings (P/E) Ratio

(IBES 1-Year Forecast)

The ratio of a company's current share price to Wall Street analysts' estimates of earnings.

Price-to-Earnings (P/E) Ratio

Trailing

The ratio of a company's current share price to its trailing 12-months earnings per share.

Price-to-Tangible Book Value

(TBV)

The ratio of a company’s current share price to its total book value, less the value of any intangible assets.

Return on Invested Capital

(ROIC)

A measure of how effectively a company uses the money (borrowed or owned) invested in its operations, typically

expressed as net income minus dividends divided by total capital (debt plus equity).

Russell 1000 Index A market capitalization–weighted index designed to measure the performance of the large-cap

segment of the U.S. equity market.

Russell 2000 Index A market capitalization–weighted index designed to measure the performance of the small-cap

segment of the U.S. equity market. It includes approximately 2,000 of the smallest securities in the Russell 3000

Index.

Standard Deviation A measure of dispersion of a set of data from its mean.

S&P 500 Index A market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and

industry group representation to represent U.S. equity performance.

Volatility-Adjusted 12-month

Return Minus 1-month Return

Cumulative twelve month stock return divided by monthly volatility, as measured by standard deviation, less the

prior month’s stock return

Important Information

FOR INVESTOR USE

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. 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.

Exchange-traded products (ETPs) 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 risks, all of which are magnified in emerging markets. ETPs 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 to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or

complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses,

and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of exchange-traded notes). The degree of

liquidity can vary significantly from one ETP to another and losses may be magnified if no liquid market exists for the ETP's shares when attempting to sell them. Each

ETP has a unique risk profile, detailed in its prospectus, offering circular, or similar material, which should be considered carefully when making investment decisions.

General—Fidelity Factor ETF Risk Disclosure—Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer,

political, regulatory, market, or economic 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

products. Depending on market conditions, fund performance may underperform compared to products that seek to track a more traditional 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).

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Before investing in any mutual fund or exchange traded product, have your client consider its investment objectives, risks, charges, and expenses.

Contact Fidelity for a prospectus, or a summary prospectus if available, containing this information. Have your client read it carefully.

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