On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research, Todd Rosenbluth, discussed the Fidelity Enhanced Small Cap ETF (FESM) with Chuck Jaffe of Money Life. The pair discussed several topics related to the fund to give investors a deeper understanding of the ETF.

Chuck Jaffe: One fund, on point for today. The expert to talk about it. Welcome to the ETF of the Week!

Welcome to the ETF of the Week, where we examine trending, newsworthy, unique, and intriguing exchange-traded funds. And we do it with Todd Rosenbluth, the head of research at VettaFi. And at VettaFi.com, you’ll find all the tools and research that you need to make yourself a savvier, smarter investor in ETFs. 

Todd Rosenbluth, it’s great to chat with you again!

Todd Rosenbluth: Same here, Chuck.

Chuck Jaffe: Your ETF of the Week is…

Todd Rosenbluth: The Fidelity Enhanced Small Cap ETF, FESM.

Chuck Jaffe: FESM, the Fidelity Enhanced Small Cap ETF. You know, Todd, on Money Life, we’ve had a whole bunch of money managers say they expect this to be a pretty good year for small-caps. They think the rally we’ve been awaiting — that we’ve had a lot of false starts on — is here and it’s coming. This is a fund with a quality track record. But is it about small-caps? Is it about “enhanced,” or is it about timing?

Todd Rosenbluth: It’s a combination of those things. So, I noticed that this ETF, FESM, saw strong inflows — $2 billion worth in 2025 — when the overall investment style of small-cap ETFs was out of favor. The IWM, the Russell 2000 ETF, bled money. The iShares Core S&P Small-Cap 600 ETF, IJR, also bled money. FESM gained money — in fact, $2 billion worth — and it’s continued to gain money.

So now that investors are more on board with the small-cap investment style, this ETF — strong performer. It is active, using computer-generated efforts, and we can talk about the investment approach in a deeper dive in a moment. 

But this fund has outperformed its peers, its benchmark over a long track record. It’s relatively cheap. Fidelity is a brand name many people are familiar with, and they are a growing player within the active ETF space. Lots of good things about this fund.

Chuck Jaffe: Let’s go back and talk about the active management on this one, because one of the things you said was “computer-driven,” and you’ve been doing a lot with active ETFs. You know, the ETF of the Week is most of the time an active pick over the potential for something that is just an index fund in the same space. 

But Fidelity is known for its active management; that’s where this shop cut its teeth. So why this particular methodology, and how does it differ from classic, you know, Fidelity, “I’ve got a stock jockey in the saddle”?

Todd Rosenbluth: You’re right, this is different. So, Fidelity offers some of those in the ETF wrapper; they have the word “Fundamental” in place of the word “Enhanced.” This is the Fidelity Enhanced Small Cap ETF. This is using computer aides to help do analysis of historical valuation, growth, profitability, and other characteristics to — in a well-diversified, relatively low-cost manner — give small-cap exposure.

So, it is active, but it’s more “strategic active” than the traditional stock-picking from a bottom-up standpoint. When you look at this fund, when I looked at this fund, relative to its benchmark, it’s not taking on that much sector exposure. So, relatively in line for industrials, healthcare, and financials. As I looked off to the side for a second to just check those, those are all double-digit percentage sectors — industrials, financials, healthcare — in line with what you’re going to see within the benchmark. 

And it’s more the stock-picking, but [with]600 stocks within this portfolio. So, you get active management, but not significantly aggressive active management the way that you can within a traditional active ETF.

Chuck Jaffe: This fund historically has gone gangbusters when the market has done well. It has been less of a performer relative to its small-cap peers at times when the market has struggled — roughly. That being the case, I mean, a lot of people turn to active management not so much to get a goose on the upside, but to have downside protection. 

In this case, do you worry at all about that? I mean, would you rather have the more human form of this — the more personal manager touch in a fund — if you’re worried at all that this rally is not going to hold with small-caps?

Todd Rosenbluth: I’m going to take your question and slide it a little bit. What we found is that for many people, their go-to vehicle to get small-cap exposure in the ETF space is the Russell 2000. The iShares Russell 2000 is IWM. That’s the largest, I believe, of those Russell 2000-based ETFs. 

That’s a relatively simple index in that it just takes the 2,000 largest stocks that don’t make it into the Russell 1000. And there’s no criteria behind it. Many of the companies that are in the Russell 2000 are unprofitable. It’s actually not one of the intentions, but that is one of the appeals for investors, and then you get unprofitable companies that are more risk-on oriented.

So, what I like about this ETF, FESM, is that there is a quality approach to it. It’s done through an active perspective, but this is a focus on profitability. So, you are going to own companies that are profitable in the small-cap space that are positioned to be able to grow. 

That should help to offset some of the volatility that you find within small-caps. But you’re right, in 2022 when the broader small-cap space was down, this fund was down, I believe slightly more than the Morningstar category, but it held up better than its benchmark.

So, that’s a data point in time. The last three years, which are all good years — all the three years while this was an ETF. We’ve talked about it in the past that there are mutual funds that convert into ETFs. 

This is an example of that; this fund from Fidelity has a long-term track record that isn’t entirely as an ETF, but as a mutual fund. It just shows you that more and more asset managers are skating where the puck is. Investors are buying ETFs; Fidelity brought one of its better products into the ETF world.

Chuck Jaffe: As I look at the way I ask you questions, Todd, one of the things is I typically only ask you about expense ratios when they might be a little expensive for what they’re doing. But this fund… well, I mean, you’re getting active management. Maybe it’s because of the style of management, but you’re almost paying index fund fees on it, aren’t you?

Todd Rosenbluth: You are. So, 28 basis points is the fee for this product. We’ve seen — I know I’ve answered a version of this question a couple of different ways — people are willing to pay up for active management when it’s working out well. And so, for example, in 2025, this fund beat its benchmark by roughly 500 basis points. 

And according to the fact sheet that I’m looking at from Fidelity, it outperformed the Morningstar category by almost a thousand basis points. So, even if this was charging more than 28 basis points, investors were being rewarded for that. But this is a relatively low-cost way of getting active small-cap exposure.

Chuck Jaffe: And the role that this plays in a portfolio — if somebody already has small-cap exposure, does it kind of depend — like, if they’ve got it through an index, okay, great, this is your active management. But if you’ve got small-caps and you have active management, does this one compare well? Make sure your fund stacks up, but we don’t want to add — or do we want to add this as a core holding regardless?

Todd Rosenbluth: So, I think this can be a core holding within a portfolio. If you — I don’t believe people should sell out of funds that they’re happy with just because we offer another idea and another alternative. So, if you are happy with the track record and the exposure that you’re getting and how much you’re paying with your existing small-cap product, then this is good to put on your radar and perhaps wait for an opportunity if you want to get more aggressive and overweight your exposure to small-caps. 

And I know you mentioned some guessing this is a good time for small-caps, and I think it is a good time for small-caps. But people may not want to be that tactical within their portfolios. But this can be a good strategic, low-cost, small-cap part of your portfolio. If you own something, you shouldn’t just pay taxes as a result of selling it. But if you own a mutual fund that is charging you a lot more than 28 basis points and it’s not delivering this type of performance, this might be a good alternative for you if you’re comfortable with ETFs.

Chuck Jaffe: Yeah, absolutely. It’s got a lot of potential for that kind of role. And like I said, not only are guests telling me about small-caps, they’re routinely saying that investors, while they may have a small-cap allocation, don’t have enough allocated towards small-caps. 

So if you’re looking to goose your small-cap allocation, start with FESM, Fidelity Enhanced Small Cap. Consider it, because it’s the ETF of the Week. Todd Rosenbluth, always great to chat with you. See you next week!

Todd Rosenbluth: I’ll see you next week!

Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. And yep, I’m Chuck Jaffe, and I’d love it if you check out my hour-long weekday podcast. You can do that by going to MoneyLifeShow.com, or you can just look for it wherever you find your favorite podcasts. 

Now, if you’re looking for more and more detailed information on your favorite ETFs or what might be your next favorite ETF — the things we talk about here — check out VettaFi.com. Dig into the tools they have there and you will become a better, savvier investor. They’re on X at @Vetta_Fi, and Todd Rosenbluth, their head of research, my guest, he’s on X as well at @ToddRosenbluth. 

The ETF of the Week is here for you every Thursday. Make sure you don’t miss an episode by following along on your favorite podcast app. And we’ll have another ETF for you to consider again next week. Until then, happy investing everybody!

Note: This article was created in part through assistance from AI tools. The content has been thoroughly reviewed and edited by the author. 

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