Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-07319
Fidelity Covington Trust
(Exact name of registrant as specified in charter)
245 Summer St., Boston, MA 02210
(Address of principal executive offices) (Zip code)
William C. Coffey, Secretary
245 Summer St.
Boston, Massachusetts 02210
(Name and address of agent for service)
Registrant’s telephone number, including area code: 617-563-7000
Date of fiscal year end: October 31
Date of reporting period: April 30, 2019
Table of Contents
| Item 1. | Reports to Stockholders |
Table of Contents
Fidelity® International High Dividend ETF
Fidelity® International Value Factor ETF
Fidelity® Targeted Emerging Markets Factor ETF
Fidelity® Targeted International Factor ETF
Semi-Annual Report
April 30, 2019
Table of Contents
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of a fund’s shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from the fund or from your financial intermediary, such as a financial advisor, broker-dealer or bank. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from a fund electronically, by contacting your financial intermediary. For Fidelity customers, visit Fidelity’s web site or call Fidelity using the contact information listed below.
You may elect to receive all future reports in paper free of charge. If you wish to continue receiving paper copies of your shareholder reports, you may contact your financial intermediary or, if you are a Fidelity customer, visit Fidelity’s website, or call Fidelity at the applicable toll-free number listed below. Your election to receive reports in paper will apply to all funds held with the fund complex/your financial intermediary.
| Account Type | Website | Phone Number | ||
| Brokerage, Mutual Fund, or Annuity Contracts: |
fidelity.com/mailpreferences | 1-800-343-3548 | ||
| Employer Provided Retirement Accounts: |
netbenefits.fidelity.com/preferences (choose ‘no’ under Required Disclosures to continue print) | 1-800-343-0860 | ||
Table of Contents
To view a fund’s proxy voting guidelines and proxy voting record for the period ended June, 30, visit http://www.fidelity.com/proxyvotingresults or visit the Securities and Exchange Commission’s (SEC) web site at http://www.sec.gov. You may also call 1-800-FIDELITY to request a free copy of the proxy voting guidelines.
Standard & Poor’s, S&P and S&P 500 are registered service marks of The McGraw-Hill Companies, Inc. and have been licensed for use by Fidelity Distributors Corporation.
Other third party marks appearing herein are the property of their respective owners.
All other marks appearing herein are registered or unregistered trademarks or service marks of FMR LLC or an affiliated company.
© 2019 FMR LLC. All Rights reserved.
This report and the financial statements contained herein are submitted for the general information of the shareholders of the funds. This report is not authorized for distribution to prospective investors in the funds unless preceded or accompanied by an effective prospectus.
A fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Forms N-Q are available on the SEC’s web site at http://www.sec.gov. A fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information regarding the operation of the SEC’s Public Reference Room may be obtained by calling 1-800-SEC-0330. For a complete list of a fund’s portfolio holdings, view the most recent holdings listing on Fidelity’s web site at http://www.fidelity.com, http://www.advisor.fidelity.com, or http://www.401k.com, as applicable.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK GUARANTEE
Neither the funds nor Fidelity Distributors Corporation is a bank.
| 3 | ||||
Table of Contents
Fidelity® International High Dividend ETF
Investment Summary (Unaudited)
| 4 | ||||
Table of Contents
Fidelity® International Value Factor ETF
Investment Summary (Unaudited)
| 5 | ||||
Table of Contents
Fidelity® Targeted Emerging Markets Factor ETF
Investment Summary (Unaudited)
| 6 | ||||
Table of Contents
Fidelity® Targeted International Factor ETF
Investment Summary (Unaudited)
| 7 | ||||
Table of Contents
Fidelity® International High Dividend ETF
Schedule of Investments April 30, 2019 (Unaudited)
Showing Percentage of Net Assets
See accompanying notes which are an integral part of the financial statements.
| 8 | ||||
Table of Contents
Affiliated Central Funds
Information regarding fiscal year to date income earned by the Fund from investments in Fidelity Central Funds is as follows:
| Fund | Income earned | |||
| Fidelity Cash Central Fund |
$ | 260 | ||
|
|
|
|||
Amounts in the income column in the above table include any capital gain distributions from underlying funds, which are presented in the corresponding line-item in the Statement of Operations, if applicable.
Investment Valuation
All investments are categorized as Level 1 under the Fair Value Hierarchy. The inputs or methodology used for valuing securities may not be an indication of the risk associated with investing in those securities. For more information on valuation inputs please refer to the Investment Valuation section in the accompanying Notes to Financial Statements.
See accompanying notes which are an integral part of the financial statements.
| 9 | ||||
Table of Contents
Fidelity® International Value Factor ETF
Schedule of Investments April 30, 2019 (Unaudited)
Showing Percentage of Net Assets
See accompanying notes which are an integral part of the financial statements.
| 10 | ||||
Table of Contents
Affiliated Central Funds
Information regarding fiscal year to date income earned by the Fund from investments in Fidelity Central Funds is as follows:
| Fund | Income earned | |||
| Fidelity Cash Central Fund |
$ | 20 | ||
|
|
|
|||
Amounts in the income column in the above table include any capital gain distributions from underlying funds, which are presented in the corresponding line-item in the Statement of Operations, if applicable.
Investment Valuation
All investments are categorized as Level 1 under the Fair Value Hierarchy. The inputs or methodology used for valuing securities may not be an indication of the risk associated with investing in those securities. For more information on valuation inputs please refer to the Investment Valuation section in the accompanying Notes to Financial Statements.
See accompanying notes which are an integral part of the financial statements.
| 11 | ||||
Table of Contents
Fidelity® Targeted Emerging Markets Factor ETF
Schedule of Investments April 30, 2019 (Unaudited)
Showing Percentage of Net Assets
See accompanying notes which are an integral part of the financial statements.
| 12 | ||||
Table of Contents
See accompanying notes which are an integral part of the financial statements.
| 13 | ||||
Table of Contents
Fidelity® Targeted Emerging Markets Factor ETF
Schedule of Investments (Unaudited) – continued
See accompanying notes which are an integral part of the financial statements.
| 14 | ||||
Table of Contents
Affiliated Central Funds
Information regarding fiscal year to date income earned by the Fund from investments in Fidelity Central Funds is as follows:
| Fund | Income earned | |||
| Fidelity Cash Central Fund |
$ | 651 | ||
|
|
|
|||
Amounts in the income column in the above table include any capital gain distributions from underlying funds, which are presented in the corresponding line-item in the Statement of Operations, if applicable.
Investment Valuation
All investments are categorized as Level 1 under the Fair Value Hierarchy. The inputs or methodology used for valuing securities may not be an indication of the risk associated with investing in those securities. For more information on valuation inputs please refer to the Investment Valuation section in the accompanying Notes to Financial Statements.
See accompanying notes which are an integral part of the financial statements.
| 15 | ||||
Table of Contents
Fidelity® Targeted International Factor ETF
Schedule of Investments April 30, 2019 (Unaudited)
Showing Percentage of Net Assets
See accompanying notes which are an integral part of the financial statements.
| 16 | ||||
Table of Contents
See accompanying notes which are an integral part of the financial statements.
| 17 | ||||
Table of Contents
Fidelity® Targeted International Factor ETF
Schedule of Investments (Unaudited) – continued
Affiliated Central Funds
Information regarding fiscal year to date income earned by the Fund from investments in Fidelity Central Funds is as follows:
| Fund | Income earned | |||
| Fidelity Cash Central Fund |
$ | 97 | ||
|
|
|
|||
See accompanying notes which are an integral part of the financial statements.
| 18 | ||||
Table of Contents
Amounts in the income column in the above table include any capital gain distributions from underlying funds, which are presented in the corresponding line-item in the Statement of Operations, if applicable.
Investment Valuation
All investments are categorized as Level 1 under the Fair Value Hierarchy. The inputs or methodology used for valuing securities may not be an indication of the risk associated with investing in those securities. For more information on valuation inputs please refer to the Investment Valuation section in the accompanying Notes to Financial Statements.
See accompanying notes which are an integral part of the financial statements.
| 19 | ||||
Table of Contents
| Statements of Assets and Liabilities | ||||||||||||||||
| April 30, 2019 (Unaudited) | ||||||||||||||||
| Fidelity International High Dividend ETF |
Fidelity International Value Factor ETF |
Fidelity Targeted Emerging Markets Factor ETF |
Fidelity Targeted International Factor ETF |
|||||||||||||
| Assets |
||||||||||||||||
| Investments in securities, at value – See accompanying schedule: |
$ | 29,318,427 | $ | 13,143,453 | $ | 9,996,952 | $ | 10,108,203 | ||||||||
| Cash |
20,298 | 1,120 | 4,773 | 1,979 | ||||||||||||
| Foreign currency held at value (cost $13,909, $13,868, $19,543 and $30,839, respectively) |
13,874 | 13,861 | 19,384 | 30,639 | ||||||||||||
| Dividends receivable |
220,539 | 104,780 | 17,505 | 41,819 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total assets |
29,573,138 | 13,263,214 | 10,038,614 | 10,182,640 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liabilities |
||||||||||||||||
| Payable for investments purchased |
6,864 | — | — | 20,748 | ||||||||||||
| Accrued management fees |
9,596 | 4,300 | 3,775 | 3,288 | ||||||||||||
| Other payables and accrued expenses |
— | — | 8,899 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total liabilities |
16,460 | 4,300 | 12,674 | 24,036 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net Assets |
$ | 29,556,678 | $ | 13,258,914 | $ | 10,025,940 | $ | 10,158,604 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net Assets consist of: |
||||||||||||||||
| Paid in capital |
31,786,960 | 14,928,188 | 10,008,903 | 10,020,760 | ||||||||||||
| Total distributable earnings (loss) |
(2,230,282 | ) | (1,669,274 | ) | 17,037 | 137,844 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net Assets |
$ | 29,556,678 | $ | 13,258,914 | $ | 10,025,940 | $ | 10,158,604 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Shares outstanding |
1,400,000 | 600,000 | 400,000 | 400,000 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net Asset Value, offering price and redemption price per share |
$ | 21.11 | $ | 22.10 | $ | 25.06 | $ | 25.40 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Investments at cost |
$ | 30,289,447 | $ | 14,078,390 | $ | 9,968,375 | $ | 10,005,314 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
See accompanying notes which are an integral part of the financial statements.
| 20 | ||||
Table of Contents
| Statements of Operations | ||||||||||||||||
| For the six months ended April 30, 2019 (Unaudited) | ||||||||||||||||
| Fidelity International High Dividend ETF |
Fidelity International Value Factor ETF |
Fidelity Targeted Emerging Markets Factor ETFA |
Fidelity Targeted International Factor ETFA |
|||||||||||||
| Investment Income |
||||||||||||||||
| Dividends |
$ | 709,906 | $ | 254,565 | $ | 44,374 | $ | 108,138 | ||||||||
| Income from Fidelity Central Funds |
260 | 20 | 651 | 97 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income before foreign taxes withheld |
710,166 | 254,585 | 45,025 | 108,235 | ||||||||||||
| Less foreign taxes withheld |
(59,222 | ) | (21,555 | ) | (5,362 | ) | (12,038 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total income |
650,944 | 233,030 | 39,663 | 96,197 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Expenses |
||||||||||||||||
| Management fees |
49,004 | 24,820 | 8,067 | 7,057 | ||||||||||||
| Independent trustees’ compensation |
63 | 35 | 8 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total expenses before reductions |
49,067 | 24,855 | 8,075 | 7,065 | ||||||||||||
| Expense reductions |
(39 | ) | (1 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total expenses |
49,028 | 24,854 | 8,075 | 7,065 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net investment income (loss) |
601,916 | 208,176 | 31,588 | 89,132 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Realized and Unrealized Gain (Loss) |
||||||||||||||||
| Net realized gain (loss) on investment securities |
(1,111,963 | ) | (236,874 | ) | (27,241 | ) | (2,782 | ) | ||||||||
| Net realized gain (loss) on foreign currency transactions |
(1,188 | ) | (3,283 | ) | 3,234 | (156 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total net realized gain (loss) |
(1,113,151 | ) | (240,157 | ) | (24,007 | ) | (2,938 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Change in net unrealized appreciation (depreciation) on investment securities (net of decrease in deferred foreign taxes of $-, $-, $8,895 and $-, respectively.) |
1,736,306 | 937,063 | 19,682 | 102,889 | ||||||||||||
| Change in net unrealized appreciation (depreciation) on assets and liabilities in foreign currencies |
(942 | ) | 353 | (226 | ) | (439 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total change in net unrealized appreciation (depreciation) |
1,735,364 | 937,416 | 19,456 | 102,450 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net gain (loss) |
622,213 | 697,259 | (4,551 | ) | 99,512 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) in net assets resulting from operations |
$ | 1,224,129 | $ | 905,435 | $ | 27,037 | $ | 188,644 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| A | For the period February 26, 2019 (commencement of operations) to April 30, 2019. |
See accompanying notes which are an integral part of the financial statements.
| 21 | ||||
Table of Contents
Financial Statements – continued
| Statements of Changes in Net Assets | ||||||||||||||||
| Fidelity International High Dividend ETF | Fidelity International Value Factor ETF | |||||||||||||||
| Six months ended April 30, 2019 (Unaudited) |
Year ended October 31, 2018A |
Six months ended April 30, 2019 (Unaudited) |
Year ended October 31, 2018A |
|||||||||||||
| Increase (Decrease) in Net Assets |
||||||||||||||||
| Operations |
||||||||||||||||
| Net investment income (loss) |
$ | 601,916 | $ | 534,726 | $ | 208,176 | $ | 343,627 | ||||||||
| Net realized gain (loss) |
(1,113,151 | ) | (246,580 | ) | (240,157 | ) | (548,885 | ) | ||||||||
| Change in net unrealized appreciation (depreciation) |
1,735,364 | (2,708,057 | ) | 937,416 | (1,873,151 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) in net assets resulting from operations |
1,224,129 | (2,419,911 | ) | 905,435 | (2,078,409 | ) | ||||||||||
|
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|
|
|
|
|
|
|
|||||||||
| Distributions to shareholders |
(541,600 | ) | (492,900 | ) | (178,200 | ) | (318,100 | ) | ||||||||
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|
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|
|||||||||
| Share transactions |
||||||||||||||||
| Proceeds from sales of shares |
10,373,969 | 21,412,991 | — | 14,928,188 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) in net assets resulting from share transactions |
10,373,969 | 21,412,991 | — | 14,928,188 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total increase (decrease) in net assets |
11,056,498 | 18,500,180 | 727,235 | 12,531,679 | ||||||||||||
| Net Assets |
||||||||||||||||
| Beginning of period |
18,500,180 | — | 12,531,679 | — | ||||||||||||
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|
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| End of period |
$ | 29,556,678 | $ | 18,500,180 | $ | 13,258,914 | $ | 12,531,679 | ||||||||
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|
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| Other Information |
||||||||||||||||
| Shares |
||||||||||||||||
| Sold |
500,000 | 900,000 | — | 600,000 | ||||||||||||
| Redeemed |
— | — | — | — | ||||||||||||
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|
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|
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|
|||||||||
| Net increase (decrease) |
500,000 | 900,000 | — | 600,000 | ||||||||||||
|
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|
|
|
|
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|
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| A | For the period from January 16, 2018 (commencement of operations) to October 31, 2018. |
See accompanying notes which are an integral part of the financial statements.
| 22 | ||||
Table of Contents
| Statements of Changes in Net Assets | ||||||||
| Fidelity Targeted Emerging Markets |
Fidelity Targeted International Factor ETF |
|||||||
| Six months ended April 30, 2019A (Unaudited) |
Six months ended April 30, 2019A (Unaudited) |
|||||||
| Increase (Decrease) in Net Assets |
||||||||
| Operations |
||||||||
| Net investment income (loss) |
$ | 31,588 | $ | 89,132 | ||||
| Net realized gain (loss) |
(24,007 | ) | (2,938 | ) | ||||
| Change in net unrealized appreciation (depreciation) |
19,456 | 102,450 | ||||||
|
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|
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|
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| Net increase (decrease) in net assets resulting from operations |
27,037 | 188,644 | ||||||
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|
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|
|||||
| Distributions to shareholders |
(10,000 | ) | (50,800 | ) | ||||
|
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|
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| Share transactions |
||||||||
| Proceeds from sales of shares |
10,008,903 | 10,020,760 | ||||||
|
|
|
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|
|||||
| Net increase (decrease) in net assets resulting from share transactions |
10,008,903 | 10,020,760 | ||||||
|
|
|
|
|
|||||
| Total increase (decrease) in net assets |
10,025,940 | 10,158,604 | ||||||
| Net Assets |
||||||||
| Beginning of period |
— | — | ||||||
|
|
|
|
|
|||||
| End of period |
$ | 10,025,940 | $ | 10,158,604 | ||||
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| Other Information |
||||||||
| Shares |
||||||||
| Sold |
400,000 | 400,000 | ||||||
| Redeemed |
— | — | ||||||
|
|
|
|
|
|||||
| Net increase (decrease) |
400,000 | 400,000 | ||||||
|
|
|
|
|
|||||
| A | For the period February 26, 2019 (commencement of operations) to April 30, 2019. |
See accompanying notes which are an integral part of the financial statements.
| 23 | ||||
Table of Contents
Financial Statements – continued
| Financial Highlights | ||||||||
| Fidelity International High Dividend ETF | ||||||||
| Six months ended April 30, 2019 (Unaudited) |
Year ended October 31, 2018A |
|||||||
| Selected Per-Share Data |
||||||||
| Net asset value, beginning of period |
$ | 20.56 | $ | 25.08 | ||||
|
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|
|
|
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| Income from Investment Operations |
||||||||
| Net investment income (loss)B |
0.50 | 0.82 | ||||||
| Net realized and unrealized gain (loss) |
0.47 | (4.63 | ) | |||||
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|
|
|||||
| Total from investment operations |
0.97 | (3.81 | ) | |||||
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|
|
|
|||||
| Distributions from net investment income |
(0.42 | ) | (0.71 | ) | ||||
|
|
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|
|||||
| Total distributions |
(0.42 | ) | (0.71 | ) | ||||
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| Net asset value, end of period |
$ | 21.11 | $ | 20.56 | ||||
|
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|
|
|||||
| Total ReturnC,D |
4.83 | % | (15.44 | )% | ||||
| Ratios to Average Net AssetsE,F,G |
||||||||
| Expense before reductions |
.39 | % | .39 | % | ||||
| Expenses net of fee waivers, if any |
.39 | % | .39 | % | ||||
| Expenses net of all reductions |
.39 | % | .39 | % | ||||
| Net investment income (loss) |
4.78 | % | 4.59 | % | ||||
| Supplemental Data |
||||||||
| Net assets, end of period (000 omitted) |
$ | 29,557 | $ | 18,500 | ||||
| Portfolio turnover rateH,I,J |
56 | % | 42 | % | ||||
| A | For the period January 16, 2018 (commencement of operations) to October 31, 2018. |
| B | Calculated based on average shares outstanding during the period. |
| C | Total returns for periods of less than one year are not annualized. |
| D | Total returns would have been lower if certain expenses had not been reduced during the applicable periods shown. |
| E | Annualized. |
| F | Expense ratios reflect operating expenses of the Fund. Expenses before reductions do not reflect amounts reimbursed by the investment adviser or reductions from brokerage service arrangements or reductions from other expense offset arrangements and do not represent the amount paid by the Fund during periods when reimbursements or reductions occur. Expenses net of fee waivers reflect expenses after reimbursement by the investment adviser but prior to the reductions from brokerage service arrangements or other expense offset arrangements. Expenses net of all reductions represent the net expenses paid by the Fund but do not include expenses of the investment companies in which the fund invests. |
| G | Fees and expenses of any underlying Fidelity Central Funds are not included in the Funds’ expense ratio. Each Fund indirectly bears its proportionate share of expenses of any underlying Fidelity Central Funds. |
| H | Amount does not include the portfolio activity of any underlying funds. |
| I | Amount not annualized. |
| J | Portfolio turnover rate excludes securities received or delivered in-kind. |
See accompanying notes which are an integral part of the financial statements.
| 24 | ||||
Table of Contents
| Financial Highlights | ||||||||
| Fidelity International Value Factor ETF | ||||||||
| Six months ended April 30, 2019 (Unaudited) |
Year ended October 31, 2018A |
|||||||
| Selected Per-Share Data |
||||||||
| Net asset value, beginning of period |
$ | 20.89 | $ | 25.00 | ||||
|
|
|
|
|
|||||
| Income from Investment Operations |
||||||||
| Net investment income (loss)B |
0.35 | 0.62 | ||||||
| Net realized and unrealized gain (loss) |
1.16 | (4.18 | ) | |||||
|
|
|
|
|
|||||
| Total from investment operations |
1.51 | (3.56 | ) | |||||
|
|
|
|
|
|||||
| Distributions from net investment income |
(0.30 | ) | (0.55 | ) | ||||
|
|
|
|
|
|||||
| Total distributions |
(0.30 | ) | (0.55 | ) | ||||
|
|
|
|
|
|||||
| Net asset value, end of period |
$ | 22.10 | $ | 20.89 | ||||
|
|
|
|
|
|||||
| Total ReturnC,D |
7.30 | % | (14.46 | )% | ||||
| Ratios to Average Net AssetsE,F,G |
||||||||
| Expense before reductions |
.39 | % | .39 | % | ||||
| Expenses net of fee waivers, if any |
.39 | % | .39 | % | ||||
| Expenses net of all reductions |
.39 | % | .39 | % | ||||
| Net investment income (loss) |
3.27 | % | 3.38 | % | ||||
| Supplemental Data |
||||||||
| Net assets, end of period (000 omitted) |
$ | 13,259 | $ | 12,532 | ||||
| Portfolio turnover rateH,I |
29 | % | 65 | %J | ||||
| A | For the period January 16, 2018 (commencement of operations) to October 31, 2018. |
| B | Calculated based on average shares outstanding during the period. |
| C | Total returns for periods of less than one year are not annualized. |
| D | Total returns would have been lower if certain expenses had not been reduced during the applicable periods shown. |
| E | Annualized. |
| F | Expense ratios reflect operating expenses of the Fund. Expenses before reductions do not reflect amounts reimbursed by the investment adviser or reductions from brokerage service arrangements or reductions from other expense offset arrangements and do not represent the amount paid by the Fund during periods when reimbursements or reductions occur. Expenses net of fee waivers reflect expenses after reimbursement by the investment adviser but prior to the reductions from brokerage service arrangements or other expense offset arrangements. Expenses net of all reductions represent the net expenses paid by the Fund but do not include expenses of the investment companies in which the fund invests. |
| G | Fees and expenses of any underlying Fidelity Central Funds are not included in the Funds’ expense ratio. Each Fund indirectly bears its proportionate share of expenses of any underlying Fidelity Central Funds. |
| H | Amount does not include the portfolio activity of any underlying funds. |
| I | Amount not annualized. |
| J | Portfolio turnover rate excludes securities received or delivered in-kind. |
See accompanying notes which are an integral part of the financial statements.
| 25 | ||||
Table of Contents
Financial Statements – continued
| Financial Highlights | ||||
| Fidelity Targeted Emerging Markets Factor ETF |
||||
| Six months ended April 30, 2019A (Unaudited) |
||||
| Selected Per-Share Data |
||||
| Net asset value, beginning of period |
$ | 25.00 | ||
|
|
|
|||
| Income from Investment Operations |
||||
| Net investment income (loss)B |
0.08 | |||
| Net realized and unrealized gain (loss) |
0.01 | |||
|
|
|
|||
| Total from investment operations |
0.09 | |||
|
|
|
|||
| Distributions from net investment income |
(0.03 | ) | ||
|
|
|
|||
| Total distributions |
(0.03 | ) | ||
|
|
|
|||
| Net asset value, end of period |
$ | 25.06 | ||
|
|
|
|||
| Total ReturnC |
0.36 | % | ||
| Ratios to Average Net AssetsD,E,F |
||||
| Expense before reductions |
.45 | % | ||
| Expenses net of fee waivers, if any |
.45 | % | ||
| Expenses net of all reductions |
.45 | % | ||
| Net investment income (loss) |
1.77 | % | ||
| Supplemental Data |
||||
| Net assets, end of period (000 omitted) |
$ | 10,026 | ||
| Portfolio turnover rateG,H |
12 | % | ||
| A | For the period February 26, 2019 (commencement of operations) to April 30, 2019. |
| B | Calculated based on average shares outstanding during the period. |
| C | Total returns for periods of less than one year are not annualized. |
| D | Annualized. |
| E | Expense ratios reflect operating expenses of the Fund. Expenses before reductions do not reflect amounts reimbursed by the investment adviser or reductions from brokerage service arrangements or reductions from other expense offset arrangements and do not represent the amount paid by the Fund during periods when reimbursements or reductions occur. Expenses net of fee waivers reflect expenses after reimbursement by the investment adviser but prior to the reductions from brokerage service arrangements or other expense offset arrangements. Expenses net of all reductions represent the net expenses paid by the Fund but do not include expenses of the investment companies in which the fund invests. |
| F | Fees and expenses of any underlying Fidelity Central Funds are not included in the Funds’ expense ratio. Each Fund indirectly bears its proportionate share of expenses of any underlying Fidelity Central Funds. |
| G | Amount does not include the portfolio activity of any underlying funds. |
| H | Amount not annualized. |
See accompanying notes which are an integral part of the financial statements.
| 26 | ||||
Table of Contents
| Financial Highlights | ||||
| Fidelity Targeted International Factor ETF |
||||
| Six months ended April 30, 2019A (Unaudited) |
||||
| Selected Per-Share Data |
||||
| Net asset value, beginning of period |
$ | 25.05 | ||
|
|
|
|||
| Income from Investment Operations |
||||
| Net investment income (loss)B |
0.22 | |||
| Net realized and unrealized gain (loss) |
0.26 | |||
|
|
|
|||
| Total from investment operations |
0.48 | |||
|
|
|
|||
| Distributions from net investment income |
(0.13 | ) | ||
|
|
|
|||
| Total distributions |
(0.13 | ) | ||
|
|
|
|||
| Net asset value, end of period |
$ | 25.40 | ||
|
|
|
|||
| Total ReturnC |
1.89 | % | ||
| Ratios to Average Net AssetsD,E,F |
||||
| Expense before reductions |
.39 | % | ||
| Expenses net of fee waivers, if any |
.39 | % | ||
| Expenses net of all reductions |
.39 | % | ||
| Net investment income (loss) |
4.94 | % | ||
| Supplemental Data |
||||
| Net assets, end of period (000 omitted) |
$ | 10,159 | ||
| Portfolio turnover rateG,H,I |
1 | % | ||
| A | For the period February 26, 2019 (commencement of operations) to April 30, 2019. |
| B | Calculated based on average shares outstanding during the period. |
| C | Total returns for periods of less than one year are not annualized. |
| D | Annualized. |
| E | Expense ratios reflect operating expenses of the Fund. Expenses before reductions do not reflect amounts reimbursed by the investment adviser or reductions from brokerage service arrangements or reductions from other expense offset arrangements and do not represent the amount paid by the Fund during periods when reimbursements or reductions occur. Expenses net of fee waivers reflect expenses after reimbursement by the investment adviser but prior to the reductions from brokerage service arrangements or other expense offset arrangements. Expenses net of all reductions represent the net expenses paid by the Fund but do not include expenses of the investment companies in which the fund invests. |
| F | Fees and expenses of any underlying Fidelity Central Funds are not included in the Funds’ expense ratio. Each Fund indirectly bears its proportionate share of expenses of any underlying Fidelity Central Funds. |
| G | Amount does not include the portfolio activity of any underlying funds. |
| H | Amount not annualized. |
| I | Portfolio turnover rate excludes securities received or delivered in-kind. |
See accompanying notes which are an integral part of the financial statements.
| 27 | ||||
Table of Contents
For the period ended April 30, 2019 (Unaudited)
1. Organization.
Fidelity International High Dividend ETF, Fidelity International Value Factor ETF, Fidelity Targeted Emerging Markets Factor ETF and Fidelity Targeted International Factor ETF (the Funds) are exchange-traded funds of Fidelity Covington Trust (the Trust) and are authorized to issue an unlimited number of shares. The Trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. Certain Funds’ investments in emerging markets can be subject to social, economic, regulatory and political uncertainties and can be extremely volatile.
2. Investments in Fidelity Central Funds.
The Funds invest in Fidelity Central Funds, which are open-end investment companies generally available only to other investment companies and accounts managed by the investment adviser and its affiliates. The Funds’ Schedules of Investments list each of the Fidelity Central Funds held as of period end, if any, as an investment of the Fund, but do not include the underlying holdings of each Fidelity Central Fund. As an Investing Fund, each Fund indirectly bears its proportionate share of the expenses of the underlying Fidelity Central Funds.
The Money Market Central Funds seek preservation of capital and current income and are managed by Fidelity Investments Money Management, Inc. (FIMM), an affiliate of the investment adviser. Annualized expenses of the Money Market Central Funds as of their most recent shareholder report date are less than .005%.
A complete unaudited list of holdings for each Fidelity Central Fund is available upon request or at the Securities and Exchange Commission (the SEC) website at www.sec.gov. In addition, the financial statements of the Fidelity Central Funds are available on the SEC website or upon request.
3. Significant Accounting Policies.
Each Fund is an investment company and applies the accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investments Companies. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP), which require management to make certain estimates and assumptions at the date of the financial statements. Actual results could differ from those estimates. Subsequent events, if any, through the date that the financial statements were issued have been evaluated in the preparation of the financial statements. The following summarizes the significant accounting policies of the Funds:
Investment Valuation. Investments are valued as of 4:00 p.m. Eastern time on the last calendar day of the period. The Board of Trustees (the Board) has delegated the day to day responsibility for the valuation of each Fund’s investments to the Fair Value Committee (the Committee) established by each Fund’s investment adviser. In accordance with valuation policies and procedures approved by the Board, each Fund attempts to obtain prices from one or more third party pricing vendors or brokers to value its investments. When current market prices, quotations or currency exchange rates are not readily available or reliable, investments will be fair valued in good faith by the Committee, in accordance with procedures adopted by the Board. Factors used in determining fair value vary by investment type and may include market or investment specific events. The frequency with which these procedures are used cannot be predicted and they may be utilized to a significant extent. The Committee oversees each Fund’s valuation policies and procedures and reports to the Board on the Committee’s activities and fair value determinations. The Board monitors the appropriateness of the procedures used in valuing each Fund’s investments and ratifies the fair value determinations of the Committee.
Each Fund categorizes the inputs to valuation techniques used to value its investments into a disclosure hierarchy consisting of three levels as shown below:
Level 1 – quoted prices in active markets for identical investments
Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, etc.)
Level 3 – unobservable inputs (including the Fund’s own assumptions based on the best information available)
Valuation techniques used to value each Fund’s investments by major category are as follows:
Equity securities, including restricted securities, for which market quotations are readily available, are valued at the last reported sale price or official closing price as reported by a third party pricing vendor on the primary market or exchange on which they are traded and are categorized as Level 1 in the hierarchy. In the event there were no sales during the day or closing prices are not available, securities are valued at the last quoted bid price or may be valued using the last available price and are generally categorized as Level 2 in the hierarchy. For foreign equity securities, when market or security specific events arise, comparisons to the valuation of American Depositary Receipts (ADRs), futures contracts, Exchange-Traded Funds (ETFs) and certain indexes as well as quoted prices for similar securities may be used and would be categorized as Level 2 in the hierarchy. For equity securities, including restricted securities, where observable inputs are limited, assumptions about market activity and risk are used and these securities may be categorized as Level 3 in the hierarchy.
Investments in open-end mutual funds, including the Fidelity Central Funds, are valued at their closing net asset value (NAV) each business day and are categorized as Level 1 in the hierarchy.
| 28 | ||||
Table of Contents
3. Significant Accounting Policies – continued
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy.
Foreign Currency. The Funds may use foreign currency contracts to facilitate transactions in foreign-denominated securities. Gains and losses from these transactions may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts’ terms.
Foreign-denominated assets, including investment securities, and liabilities are translated into U.S. dollars at the exchange rates at period end. Purchases and sales of investment securities, income and dividends received and expenses denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date.
The effects of exchange rate fluctuations on investments are included with the net realized and unrealized gain (loss) on investment securities. Other foreign currency transactions resulting in realized and unrealized gain (loss) are disclosed separately.
Investment Transactions and Income. For financial reporting purposes and for processing shareholder transactions, the Funds’ investment holdings and NAV include trades executed through the end of the last business day of the period and prior business day, respectively. The NAV per share for processing shareholder transactions is calculated as of the close of business of NYSE Arca for Fidelity International High Dividend ETF and Fidelity International Value Factor ETF and of Cboe BZX Exchange, Inc. (CboeBZX) for Fidelity Targeted Emerging Markets Factor ETF and Fidelity Targeted International Factor ETF, normally 4:00 p.m. Eastern time and includes trades executed through the end of the prior business day. Gains and losses on securities sold are determined on the basis of identified cost. Dividend income is recorded on the ex-dividend date, except for certain dividends from foreign securities where the ex-dividend date may have passed, which are recorded as soon as the Funds are informed of the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Income and capital gain distributions from Fidelity Central Funds, if any, are recorded on the ex-dividend date. Investment income is recorded net of foreign taxes withheld where recovery of such taxes is uncertain.
Expenses. Expenses directly attributable to a fund are charged to that fund. Expenses attributable to more than one fund are allocated among the respective funds on the basis of relative net assets or other appropriate methods. Expense estimates are accrued in the period to which they relate and adjustments are made when actual amounts are known.
Income Tax Information and Distributions to Shareholders. Each year, each Fund intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code, including distributing substantially all of its taxable income and realized gains. As a result, no provision for U.S. Federal income taxes is required. Each Fund files a U.S. federal tax return, in addition to state and local tax returns as required. A fund’s federal income tax returns are subject to examination by the Internal Revenue Service (IRS) for a period of three fiscal years after they are filed. State and local tax returns may be subject to examination for an additional fiscal year depending on the jurisdiction. Foreign taxes are provided for based on each Fund’s understanding of the tax rules and rates that exist in the foreign markets in which it invests. Fidelity Targeted Emerging Markets Factor ETF is subject to a tax imposed on capital gains by certain countries in which it invests. An estimated deferred tax liability for net unrealized appreciation on the applicable securities is included in Other payables and accrued expenses on the Statement of Assets & Liabilities.
Distributions are declared and recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP.
Capital accounts within the financial statements are adjusted for permanent book-tax differences. These adjustments have no impact on net assets or the results of operations. Capital accounts are not adjusted for temporary book-tax differences which will reverse in a subsequent period.
Book-tax differences are primarily due to foreign currency transactions, passive foreign investment companies (PFIC) and losses deferred due to wash sales.
As of period end, the cost and unrealized appreciation (depreciation) in securities, and derivatives if applicable, for federal income tax purposes were as follows for each Fund:
| Tax cost | Gross unrealized appreciation |
Gross unrealized depreciation |
Net unrealized appreciation (depreciation) on securities and other investments |
|||||||||||||
| Fidelity International High Dividend ETF |
$ | 30,391,752 | $ | 932,332 | $ | (2,005,657 | ) | $ | (1,073,325 | ) | ||||||
| Fidelity International Value Factor ETF |
14,118,879 | 776,648 | (1,752,074 | ) | (975,426 | ) | ||||||||||
| Fidelity Targeted Emerging Markets Factor ETF |
9,968,860 | 373,928 | (345,836 | ) | 28,092 | |||||||||||
| Fidelity Targeted International Factor ETF |
10,006,996 | 450,085 | (348,878 | ) | 101,207 | |||||||||||
| 29 | ||||
Table of Contents
Notes to Financial Statements – continued
3. Significant Accounting Policies – continued
Capital loss carryforwards are only available to offset future capital gains of the Funds to the extent provided by regulations and may be limited. Under the Regulated Investment Company Modernization Act of 2010 (the Act), the Funds are permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period and such capital losses are required to be used prior to any losses that expire. The capital loss carryforward information presented below, including any applicable limitation, is estimated as of fiscal year end and is subject to adjustment.
| No-expiration Short-term |
No-expiration Long-term |
Total capital loss carryforward |
||||||||||
| Fidelity International High Dividend ETF |
$ | (200,146 | ) | $ | — | $ | (200,146 | ) | ||||
| Fidelity International Value Factor ETF |
(540,315 | ) | — | (540,315 | ) | |||||||
Restricted Securities. The Funds may invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. Information regarding restricted securities is included at the end of each applicable Fund’s Schedule of Investments.
4. Purchases and Sales of Investments.
Purchases and sales of securities, other than short-term securities and in-kind transactions, were as follows:
| Purchases | Sales | |||||||
| Fidelity International High Dividend ETF |
$ | 14,201,146 | $ | 14,091,267 | ||||
| Fidelity International Value Factor ETF |
3,648,394 | 3,615,624 | ||||||
| Fidelity Targeted Emerging Markets Factor ETF |
11,184,493 | 1,188,895 | ||||||
| Fidelity Targeted International Factor ETF |
1,256,861 | 129,964 | ||||||
Securities received or delivered in-kind through subscriptions and redemptions were as follows:
| In-kind Subscriptions |
In-kind Redemptions |
|||||||
| Fidelity International High Dividend ETF |
$ | 10,166,912 | $ | — | ||||
| Fidelity International Value Factor ETF |
— | — | ||||||
| Fidelity Targeted Emerging Markets Factor ETF |
— | — | ||||||
| Fidelity Targeted International Factor ETF |
8,916,338 | — | ||||||
5. Fees and Other Transactions with Affiliates.
Management Fee. FMR Co., Inc. (FMRC), an affiliate of FMR provides the Funds with investment management related services for which the Funds pay a monthly management fee that is based on an annual rate of .39% of average net assets for Fidelity International High Dividend ETF, Fidelity International Value Factor ETF and Fidelity Targeted International Factor ETF. Under the management contract, FMRC pays all other expenses, except the compensation of the independent Trustees and certain other expenses such as interest expense.
Fidelity Targeted Emerging Markets Factor ETF’s management fee is based on an annual rate of .45% of average net assets. Under the management contract, FMRC pays all other expenses, except the compensation of the independent Trustees and certain other expenses such as interest expense.
Sub-Adviser. Geode Capital Management, LLC (Geode), serves as sub-adviser for the Funds. Geode provides discretionary investment advisory services to the Funds and is paid by the investment adviser for providing these services.
Interfund Trades. The Funds may purchase from or sell securities to other funds affiliated with the sub-adviser under procedures adopted by the Board. The procedures have been designed to ensure these interfund trades are executed in accordance with Rule 17a-7 of the 1940 Act. Interfund trades are included within the respective purchases and sales amounts shown in the Purchases and Sales of Investments note.
6. Expense Reductions.
Through arrangements with each applicable Fund’s custodian, credits realized as a result of uninvested cash balances were used to reduce each applicable Fund’s management fee. During the period, these credits reduced management fees by the following amounts:
| Amount | ||||
| Fidelity International High Dividend ETF |
$ | 39 | ||
| Fidelity International Value Factor ETF |
1 | |||
| 30 | ||||
Table of Contents
7. Share Transactions.
The Funds issue and redeem shares at NAV only with certain authorized participants in large increments known as Creation Units. Purchases of Creation Units are made by tendering a basket of designated stocks to a fund and redemption proceeds are paid with a basket of securities from a fund’s portfolio with a balancing cash component to equate the market value of the basket of securities delivered or redeemed to the NAV per Creation Unit on the transaction date. Cash may be substituted equivalent to the value of certain securities generally when they are not available in sufficient quantity for delivery. A fund’s shares are available in smaller increments to investors in the secondary market at market prices and may be subject to commissions. Authorized participants pay a transaction fee to the shareholder servicing agent when purchasing and redeeming Creation Units of a fund. The transaction fee is used to defray the costs associated with the issuance and redemption of Creation Units.
8. Other.
The Funds’ organizational documents provide former and current trustees and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Funds. In the normal course of business, the Funds may also enter into contracts that provide general indemnifications. The Funds’ maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Funds. The risk of material loss from such claims is considered remote.
| 31 | ||||
Table of Contents
Shareholder Expense Example (Unaudited)
As a shareholder of a Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in a Fund and to compare these costs with the ongoing costs of investing in other funds.
The actual expense Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (November 1, 2018 to April 30, 2019) for Fidelity International High Dividend ETF and Fidelity International Value Factor ETF and for the period (February 26, 2019 to April 30, 2019) for Fidelity Targeted Emerging Markets Factor ETF and Fidelity Targeted International Factor ETF. The hypothetical expense Example is based on an investment of $1,000 invested for the one-half year period (November 1, 2018 to April 30, 2019).
Actual Expenses
For each fund, the first line of the accompanying table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000.00 (for example, an $8,600 account value divided by $1,000.00 = 8.6), then multiply the result by the number in the first line for each Fund under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. In addition, each Fund, as a shareholder in the underlying Fidelity Central Funds, will indirectly bear its pro-rata share of the fees and expenses incurred by the underlying Fidelity Central Funds. These fees and expenses are not included in each Fund’s annualized expense ratio used to calculate the expense estimates in the table below.
Hypothetical Example for Comparison Purposes
For each fund, the second line of the accompanying table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. In addition, each Fund, as a shareholder in the underlying Fidelity Central Funds, will indirectly bear its pro-rata share of the fees and expenses incurred by the underlying Fidelity Central Funds. These fees and expenses are not included in each Fund’s annualized expense ratio used to calculate the expense estimates in the table below.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
| Annualized Expense RatioA |
Beginning Account Value |
Ending Account Value April 30, 2019 |
Expenses Paid During Period |
|||||||||||||
| Fidelity International High Dividend ETF |
0.39% | |||||||||||||||
| Actual |
$ | 1,000.00 | $ | 1,048.30 | $ | 1.98 | B | |||||||||
| HypotheticalC |
$ | 1,000.00 | $ | 1,022.86 | $ | 1.96 | D | |||||||||
| Fidelity International Value Factor ETF |
0.39% | |||||||||||||||
| Actual |
$ | 1,000.00 | $ | 1,073.00 | $ | 2.00 | B | |||||||||
| HypotheticalC |
$ | 1,000.00 | $ | 1,022.86 | $ | 1.96 | D | |||||||||
| Fidelity Targeted Emerging Markets Factor ETF |
0.45% | |||||||||||||||
| Actual |
$ | 1,000.00 | $ | 1,003.60 | $ | 0.79 | B | |||||||||
| HypotheticalC |
$ | 1,000.00 | $ | 1,022.56 | $ | 2.26 | D | |||||||||
| Fidelity Targeted International Factor ETF |
0.39% | |||||||||||||||
| Actual |
$ | 1,000.00 | $ | 1,018.90 | $ | 0.69 | B | |||||||||
| HypotheticalC |
$ | 1,000.00 | $ | 1,022.86 | $ | 1.96 | D | |||||||||
| A | Annualized expense ratio reflects expenses net of applicable fee waivers. |
| B | Actual expenses are equal to the Fund’s annualized expense ratio, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period) for Fidelity International High Dividend Factor ETF and Fidelity International Value Factor ETF and multiplied by 64/365 (to reflect the period February 26, 2019 to April 30, 2019) for Fidelity Targeted Emerging Markets Factor ETF and Fidelity Targeted International Factor ETF. |
| C | 5% return per year before expenses. |
| D | Hypothetical expenses are equal to the Fund’s annualized expense ratio, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). |
| 32 | ||||
Table of Contents
Board Approval of Investment Advisory Contracts and Management Fees
Fidelity International High Dividend ETF
Fidelity International Value Factor ETF
Each year, the Board of Trustees, including the Independent Trustees (together, the Board), votes on the renewal of the management contract with FMR Co., Inc. (FMRC), an affiliate of Fidelity Management & Research Company (FMR), and the sub-advisory agreement for each fund (Sub-Advisory Agreement) with Geode Capital Management, LLC (Geode) (together, the Advisory Contracts). FMRC and Geode are referred to herein as the Investment Advisers. The Board, assisted by the advice of fund counsel and Independent Trustees’ counsel, requests and considers a broad range of information relevant to the renewal of the Advisory Contracts throughout the year.
The Board meets regularly and, at each of its meetings, covers an extensive agenda of topics and materials and considers factors that are relevant to its annual consideration of the renewal of each fund’s Advisory Contracts, including the services and support provided to each fund and its shareholders. The Board has established various standing committees (Committees), each composed of and chaired by Independent Trustees with varying backgrounds, to which the Board has assigned specific subject matter responsibilities in order to enhance effective decision-making by the Board. The Board, acting directly and through its Committees, requests and receives information concerning the annual consideration of the renewal of each fund’s Advisory Contracts. The Board also meets as needed to review matters specifically related to the Board’s annual consideration of the renewal of the Advisory Contracts. Members of the Board may also meet with trustees of other Fidelity funds through joint ad hoc committees to discuss certain matters relevant to all of the Fidelity funds.
At its January 2019 meeting, the Board unanimously determined to renew each fund’s Advisory Contracts. In reaching its determination, the Board considered all factors it believed relevant, including (i) the nature, extent, and quality of the services to be provided to each fund and its shareholders (including the investment performance of each fund); (ii) the competitiveness of each fund’s management fee and total expense ratio relative to peer funds; (iii) the total costs of the services to be provided by and the profits to be realized by Fidelity and Geode from their respective relationships with each fund; and (iv) the extent to which, if any, economies of scale exist and would be realized as each fund grows, and whether any economies of scale are appropriately shared with fund shareholders.
In considering whether to renew the Advisory Contracts for each fund, the Board reached a determination, with the assistance of fund counsel and Independent Trustees’ counsel and through the exercise of its business judgment, that the renewal of the Advisory Contracts was in the best interests of each fund and its shareholders and that the compensation payable under the Advisory Contracts was fair and reasonable. The Board’s decision to renew the Advisory Contracts was not based on any single factor, but rather was based on a comprehensive consideration of all the information provided to the Board at its meetings throughout the year. The Board, in reaching its determination to renew the Advisory Contracts, was aware that shareholders of each fund have a broad range of investment choices available to them, including a wide choice among funds offered by Fidelity’s competitors, and that each fund’s shareholders, who have the opportunity to review and weigh the disclosure provided by the fund in its prospectus and other public disclosures, have chosen to invest in that fund, which is part of the Fidelity family of funds.
Nature, Extent, and Quality of Services Provided. The Board considered staffing as it relates to the funds, including the backgrounds of investment personnel of Fidelity and Geode, and also considered the funds’ investment objectives, strategies, and related investment philosophies. The Independent Trustees also had discussions with senior management of Fidelity’s investment operations and investment groups and with representatives of Geode. The Board considered the structure of the investment personnel compensation programs and whether the structures provide appropriate incentives to act in the best interests of each fund. Additionally, the Board considered the portfolio managers’ investments, if any, in the funds that they manage.
The Trustees also discussed with representatives of Fidelity, at meetings throughout the year, Fidelity’s role in, among other things, overseeing compliance with federal securities laws and other applicable requirements by Geode with respect to the funds and monitoring and overseeing the performance and investment capabilities of Geode. The Trustees considered that the Board had received from Fidelity periodic reports about its oversight and due diligence processes, as well as periodic reports regarding the performance of Geode.
The Board also considered the nature, extent and quality of services provided by Geode. The Trustees noted that under the Sub-Advisory Agreement, subject to oversight by Fidelity, Geode is responsible for, among other things, identifying investments and arranging for execution of portfolio transactions to implement each fund’s investment strategy. In addition, the Trustees noted that Geode is responsible for providing such reporting as may be requested by Fidelity to fulfill its oversight responsibilities discussed above.
Resources Dedicated to Investment Management and Support Services. The Board and the Fund Oversight and Research Committees reviewed the general qualifications and capabilities of Fidelity’s and Geode’s investment staffs, including their size, education, experience, and resources, as well as Fidelity’s and Geode’s approach to recruiting, training, managing, and compensating investment personnel. The Board considered that Fidelity’s and Geode’s investment professionals have extensive resources, tools and capabilities so as to provide competitive investment results over time, and that those professionals also have access to sophisticated tools that permit them to assess portfolio construction and risk and performance attribution characteristics continuously. Additionally, in its deliberations, the Board considered Fidelity’s and Geode’s trading, risk management, compliance, and technology and operations capabilities and resources, which are integral parts of the investment management process.
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Board Approval of Investment Advisory Contracts and Management Fees – continued
Shareholder and Administrative Services. The Board considered (i) the nature, extent, quality, and cost of advisory and administrative services provided by the Investment Advisers and their affiliates under the Advisory Contracts and by FMRC’s affiliates under separate agreements covering pricing and bookkeeping and securities lending services for each fund; (ii) the nature and extent of the supervision of third party service providers, principally State Street Bank and Trust Company, each fund’s transfer agent and custodian; and (iii) the resources devoted to, and the record of compliance with, each fund’s compliance policies and procedures. The Board also reviewed the allocation of fund brokerage, including allocations to brokers affiliated with the Investment Advisers.
The Board noted that the growth of fund assets over time across the complex allows Fidelity to reinvest in the development of services designed to enhance the value and convenience of the Fidelity funds as investment vehicles. These services include 24-hour access to account information and market information through telephone representatives and over the Internet, investor education materials and asset allocation tools, and the expanded availability of Fidelity Investor Centers.
Investment in a Large Fund Family. The Board considered the benefits to shareholders of investing in a Fidelity fund, including the benefits of investing in a fund that is part of a large family of funds offering a variety of investment disciplines and providing a large variety of mutual fund investor services. The Board noted that Fidelity had taken, or had made recommendations that resulted in the Fidelity funds taking, a number of actions over the previous year that benefited particular funds, including: (i) continuing to dedicate additional resources to Fidelity’s investment research process, which includes meetings with management of issuers of securities in which the funds invest, and to the support of the senior management team that oversees asset management; (ii) continuing efforts to enhance Fidelity’s global research capabilities; (iii) launching new funds and making other enhancements to meet client needs; (iv) launching new share classes of existing funds; (v) eliminating purchase minimums and broadening eligibility requirements for certain funds and share classes; (vi) reducing management fees and total expenses for certain growth equity funds and index funds; (vii) lowering expense caps for certain existing funds and classes, and converting certain voluntary expense caps to contractual caps, to reduce expenses borne by shareholders; (viii) eliminating short-term redemption fees for funds that had such fees; (ix) rationalizing product lines and gaining increased efficiencies from fund mergers and share class consolidations; (x) continuing to develop, acquire and implement systems and technology to improve services to the funds and shareholders, strengthen information security, and increase efficiency; and (xi) continuing to implement enhancements to further strengthen Fidelity’s product line to increase investors’ probability of success in achieving their investment goals, including retirement income goals.
Investment Performance. The Board considered whether each fund has operated in accordance with its investment objective, as well as its record of compliance with its investment restrictions. As the funds recently commenced operations, the Board did not believe that it was appropriate to assign significant weight to their limited investment performance.
Based on its review, the Board concluded that the nature, extent, and quality of services provided to each fund under the Advisory Contracts should continue to benefit the shareholders of each fund.
Competitiveness of Management Fee and Total Expense Ratio. The Board considered each fund’s management fee and total expense ratio compared to “mapped groups” of competitive funds created for the purpose of facilitating the Trustees’ competitive analysis of management fees and total expenses. Fidelity creates “mapped groups” by combining similar Lipper investment objective categories that have comparable investment mandates. Combining Lipper investment objective categories aids the Board’s management fee and total expense ratio comparisons by broadening the competitive group used for comparison.
Management Fee. The Board considered two proprietary management fee comparisons for the period ended June 30 shown in basis points (BP) in the charts below. The group of Lipper funds used by the Board for management fee comparisons is referred to below as the “Total Mapped Group.” The Total Mapped Group comparison focuses on a fund’s standing in terms of gross management fees before expense reimbursements or caps relative to the total universe of funds with comparable investment mandates, regardless of whether their management fee structures also are comparable. Funds with comparable investment mandates offer exposure to similar types of securities. Funds with comparable management fee structures have similar management fee contractual arrangements (e.g., flat rate charged for advisory services, all-inclusive fee rate, etc.). “TMG %” represents the percentage of funds in the Total Mapped Group that had management fees that were lower than a fund’s. For example, a hypothetical TMG % of 20% would mean that 80% of the funds in the Total Mapped Group had higher, and 20% had lower, management fees than a fund. The funds’ actual TMG % and the number of funds in the Total Mapped Group are in the charts below. The “Asset-Size Peer Group” (ASPG) comparison focuses on a fund’s standing relative to a subset of non-Fidelity funds within the Total Mapped Group that are similar in size and management fee structure. For example, if a fund is in the first quartile of the ASPG, the fund’s management fee ranks in the least expensive or lowest 25% of funds in the ASPG. The ASPG represents at least 15% of the funds in the Total Mapped Group with comparable asset size and management fee structures, subject to a minimum of 50 funds (or all funds in the Total Mapped Group if fewer than 50). Additional information, such as the ASPG quartile in which a fund’s management fee rate ranked, is also included in the charts and was considered by the Board.
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Fidelity International High Dividend ETF
Fidelity International Value Factor ETF
The Board noted that each fund’s management fee rate ranked below the median of its Total Mapped Group and below the median of its ASPG for the period ended June 30, 2018.
The Board noted that it and the boards of other Fidelity funds formed an ad hoc Committee on Group Fee, which meets periodically, to conduct an in-depth review of the “group fee” component of the management fee of funds with such management fee structures. The Committee’s focus included the mechanics of the group fee, the competitive landscape of group fee structures, Fidelity funds with no group fee component (such as the funds) and investment products not included in group fee assets. The Board also considered that, for funds subject to the group fee, FMR agreed to voluntarily waive fees over a specified period of time in amounts designed to account for assets converted from certain funds to certain collective investment trusts.
Based on its review, the Board concluded that each fund’s management fee is fair and reasonable in light of the services that the fund receives and the other factors considered.
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Board Approval of Investment Advisory Contracts and Management Fees – continued
Total Expense Ratio. In its review of each fund’s total expense ratio, the Board considered the fund’s all-inclusive fee rate. The Board also considered other expenses, such as transfer agent fees, pricing and bookkeeping fees, and custodial, legal, and audit fees, paid by FMRC under the all-inclusive arrangement. The Board also noted that Fidelity may agree to waive fees and expenses from time to time, and the extent to which, if any, it has done so for each fund. As part of its review, the Board also considered the current total expense ratios of each fund compared to competitive fund median expenses.
In connection with the renewal of the Advisory Contracts, the Board also approved amendments to the management contract for each fund to clarify that the fund pays its non-operating expenses, including brokerage commissions and fees and expenses associated with the fund’s securities lending program. The Board considered that the amendments would not change the services provided to the funds or the party responsible for making such payments under the current management contracts.
The Board noted that each fund’s total expense ratio ranked below the competitive median for the period ended June 30, 2018.
Fees Charged to Other Clients. The Board also considered fee structures applicable to clients of Fidelity and Geode, such as other funds advised or subadvised by Fidelity or Geode, pension plan clients, and other institutional clients with similar mandates. The Board noted that a joint ad hoc committee created by it and the boards of other Fidelity funds periodically reviews and compares Fidelity’s institutional investment advisory business with its business of providing services to the Fidelity funds and also noted the most recent findings of the committee. The Board noted that the committee’s review included a consideration of the differences in services provided, fees charged, and costs incurred, as well as competition in the markets serving the different categories of clients.
Based on its review of total expense ratios and fees charged to other Fidelity clients, the Board concluded that each fund’s total expense ratio was reasonable in light of the services that the fund and its shareholders receive and the other factors considered.
Costs of the Services and Profitability. The Board considered the revenues earned and the expenses incurred by Fidelity in conducting the business of developing, marketing, distributing, managing, administering and servicing the Fidelity funds and servicing the Fidelity funds’ shareholders.
On an annual basis, Fidelity presents to the Board information about the profitability of its relationships with the Fidelity funds. Fidelity calculates profitability information for each Fidelity fund, as well as aggregate profitability information for groups of Fidelity funds and all Fidelity funds, using a series of detailed revenue and cost allocation methodologies which originate with the books and records of Fidelity on which Fidelity’s audited financial statements are based. The Audit Committee of the Board reviews any significant changes from the prior year’s methodologies.
PricewaterhouseCoopers LLP (PwC), auditor to Fidelity and certain Fidelity funds, has been engaged annually by the Board as part of the Board’s assessment of Fidelity’s profitability analysis. PwC’s engagement includes the review and assessment of the methodologies used by Fidelity in determining the revenues and expenses attributable to Fidelity’s mutual fund business, and completion of agreed-upon procedures in respect of the mathematical accuracy of the Fidelity fund profitability information and its conformity to established allocation methodologies. After considering PwC’s reports issued under the engagement and information provided by Fidelity, the Board concluded that while other allocation methods may also be reasonable, Fidelity’s profitability methodologies are reasonable in all material respects.
The Board also reviewed Fidelity’s and Geode’s non-fund businesses and potential indirect benefits such businesses may have received as a result of their association with Fidelity’s mutual fund business (i.e., fall-out benefits) as well as cases where Fidelity’s and Geode’s affiliates may benefit from the Fidelity funds’ business. The Board noted that changes to fall-out benefits year-over-year reflect business developments at Fidelity’s various businesses.
The Board considered the costs of the services provided by and the profits realized by Fidelity in connection with the operation of the Fidelity funds and was satisfied that the profitability was not excessive.
Economies of Scale. The Board considered whether there have been economies of scale in respect of the management of the Fidelity funds, whether the Fidelity funds (including each fund) have appropriately benefited from any such economies of scale, and whether there is potential for realization of any further economies of scale. The Board considered the extent to which each fund will benefit from economies of scale as assets grow through increased services to the fund, through waivers or reimbursements, or through fee or expense ratio reductions. The Board recognized that, due to each fund’s current contractual arrangements, its expense ratio will not decline if the fund’s operating costs decrease as assets grow, or rise as assets decrease. The Board also noted that a committee (the Economies of Scale Committee) created by it and the boards of other Fidelity funds periodically analyzes whether Fidelity attains economies of scale in respect of the management and servicing of the Fidelity funds, whether the Fidelity funds have appropriately benefited from such economies of scale, and whether there is potential for realization of any further economies of scale.
The Board concluded, taking into account the analysis of the Economies of Scale Committee, that economies of scale, if any, are being appropriately shared between fund shareholders and Fidelity.
Additional Information Requested by the Board. In order to develop fully the factual basis for consideration of the Fidelity funds’ advisory contracts, the Board requested and received additional information on certain topics, including: (i) fund performance trends, in particular the underperformance of certain funds, and Fidelity’s long-term strategies for certain funds; (ii) Fidelity’s fund profitability methodology,
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profitability trends for certain funds, and the impact of certain factors on fund profitability results; (iii) metrics for evaluating index fund and ETF performance and information about ETF trading characteristics; (iv) the methodology with respect to the evaluation of competitive fund data and peer group classifications and fee comparisons; (v) the expense structures for different funds and classes; (vi) information regarding other accounts managed by Fidelity, including collective investment trusts; and (vii) Fidelity’s philosophies and strategies for evaluating funds and classes with lower or declining asset levels.
Based on its evaluation of all of the conclusions noted above, and after considering all factors it believed relevant, the Board concluded that the advisory and sub-advisory fee arrangements are fair and reasonable, and that each fund’s Advisory Contracts should be renewed.
Board Approval of Investment Advisory Contracts and Management Fees
Fidelity Targeted International Factor ETF
Fidelity Targeted Emerging Markets Factor ETF
On November 14, 2018, the Board of Trustees, including the Independent Trustees (together, the Board), voted to approve the management contract with FMR Co., Inc. (FMRC) and the sub-advisory agreement with Geode Capital Management, LLC (Geode) (together, the Advisory Contracts) for each fund. FMRC and Geode are collectively referred to herein as the Investment Advisers. The Board, assisted by the advice of fund counsel and Independent Trustees’ counsel, considered a broad range of information.
At the March 2019 meeting, the Board ratified an amended and restated sub-advisory agreement with Geode for Fidelity Targeted International Factor ETF that lowered the sub-advisory fee rate that FMRC pays to Geode, on behalf of the fund, by 0.5 basis points (effective November 14, 2018).
Nature, Extent, and Quality of Services Provided. The Board considered staffing as it relates to the funds, including the backgrounds of investment personnel of Fidelity and Geode, and also considered the funds’ investment objectives, strategies, and related investment philosophies.
Resources Dedicated to Investment Management and Support Services. The Board and the Fund Oversight and Research Committees reviewed the general qualifications and capabilities of Fidelity’s and Geode’s investment staffs, including their size, education, experience, and resources, as well as Fidelity’s approach to recruiting, training, managing, and compensating investment personnel. The Board noted that Fidelity has continued to increase the resources devoted to non-U.S. offices, including expansion of Fidelity’s global investment organization. Additionally, in its deliberations, the Board considered Fidelity’s and Geode’s trading, risk management, compliance, and technology and operations capabilities and resources, which are integral parts of the investment management process.
Shareholder and Administrative Services. The Board considered the nature, extent, quality, and cost of advisory, administrative, and shareholder services to be performed by the Investment Advisers, and their affiliates and a third party service provider under the Advisory Contracts and under separate agreements covering transfer agency, pricing and bookkeeping, and securities lending services for each fund. The Board also considered the nature and extent of the supervision of third party service providers.
The Board noted that the growth of fund assets over time across the complex allows Fidelity to reinvest in the development of services designed to enhance the value or convenience of the Fidelity funds as investment vehicles. These services include 24-hour access to account information and market information through telephone representatives and over the Internet, investor education materials and asset allocation tools, and the expanded availability of Fidelity Investor Centers.
Investment Performance. Each fund is a new fund and therefore had no historical performance for the Board to review at the time it approved each fund’s Advisory Contracts. The Board considered Geode’s experience in managing certain existing Fidelity factor-based ETFs, equity index and enhanced index mutual funds.
Based on its review, the Board concluded that the nature, extent, and quality of services to be provided to each fund under the Advisory Contracts should benefit the shareholders of each fund.
Competitiveness of Management Fee and Total Expense Ratio. The Board considered each fund’s proposed management fee and projected total expense ratio in reviewing the Advisory contracts, and the fact that the management contract provides that FMRC will be responsible for paying all operating expenses of the fund with the exception of fees and expenses of the Independent Trustees, interest, taxes, proxy and shareholder meeting expenses, and non-recurring expenses. The Board noted that each fund’s proposed management fee rate is lower than the median fee rate of funds with similar Lipper investment objective categories and comparable investment mandates, regardless of whether their management fee structures are comparable. The Board also considered that the projected total expense ratio of each fund is below the median of those funds and classes used by the Board for management fee comparisons.
In its review of the proposed sub-advisory fee rate under the amended and restated sub-advisory agreement with Geode on behalf of Fidelity Targeted International Factor ETF, the Board noted that FMRC, not the fund, pays Geode’s sub-advisory fee out of its management fee. The Board considered that the amended and restated sub-advisory agreements will not result in any changes to the current management fee rate under the
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Board Approval of Investment Advisory Contracts and Management Fees – continued
fund’s management contract with FMRC or total expenses paid by the shareholders of the fund. The Board noted that the fund’s management fee rate and total expense ratio will continue to rank below the median of its competitor funds based on competitive mapped group data provided to the Board in connection with the approval of the management contract with FMRC and sub-advisory agreement with Geode at its November 2018 meeting.
Based on its review, the Board concluded that each fund’s management fee and projected total expense ratio were reasonable in light of the services that the fund and its shareholders will receive and the other factors considered.
Costs of the Services and Profitability. Each fund is a new fund and therefore no revenue, cost, or profitability data was available for the Board to review in respect of each fund at the time it approved the Advisory Contracts. In connection with its future renewal of each fund’s Advisory Contracts, the Board will consider the revenues earned and the expenses incurred by Fidelity in conducting the business of developing, marketing, distributing, managing, administering and servicing each fund and servicing each fund’s shareholders.
Economies of Scale. The Board will consider economies of scale when there is operating experience to permit assessment thereof. It noted that, notwithstanding the entrepreneurial risk associated with a new fund, the management fee was at a level normally associated, by comparison with competitors, with very high fund net assets, and Fidelity asserted to the Board that the level of the fee anticipated economies of scale at lower asset levels even before, if ever, economies of scale are achieved. The Board also noted that each fund and its shareholders would have access to the very considerable number and variety of services available through Fidelity and its affiliates.
Based on its evaluation of all of the conclusions noted above, and after considering all factors it believed relevant, the Board concluded that the advisory and sub-advisory fee structures are fair and reasonable, and that each fund’s Advisory Contracts should be approved.
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| IHD-IVE-SANN-0619 1.9885305.101 |
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| Item 2. | Code of Ethics |
Not applicable.
| Item 3. | Audit Committee Financial Expert |
Not applicable.
| Item 4. | Principal Accountant Fees and Services |
Not applicable.
| Item 5. | Audit Committee of Listed Registrants |
Not applicable.
| Item 6. | Investments |
| (a) | Not applicable. |
| (b) | Not applicable |
| Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies |
Not applicable.
| Item 8. | Portfolio Managers of Closed-End Management Investment Companies |
Not applicable.
| Item 9. | Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers |
Not applicable.
| Item 10. | Submission of Matters to a Vote of Security Holders |
There were no material changes to the procedures by which shareholders may recommend nominees to the Fidelity Covington Trust’s Board of Trustees.
| Item 11. | Controls and Procedures |
(a)(i) The President and Treasurer and the Chief Financial Officer have concluded that the Fidelity Covington Trust’s (the “Trust”) disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act) provide reasonable
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assurances that material information relating to the Trust is made known to them by the appropriate persons, based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of this report.
(a)(ii) There was no change in the Trust’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting.
| Item 12. | Disclosure of Securities Lending Activities for Closed-End Management Investment Companies |
Not applicable.
| Item 13. | Exhibits |
| (a) (1) |
Not applicable. | |
| (a) (2) |
Certification pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit 99.CERT. | |
| (a) (3) |
Not applicable. | |
| (b) |
Certification pursuant to Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b)) is furnished and attached hereto as Exhibit 99.906CERT. | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Fidelity Covington Trust
| By: | /s/ Stacie M. Smith | |
| Stacie M. Smith | ||
| President and Treasurer | ||
| Date: | June 25, 2019 | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Stacie M. Smith | |
| Stacie M. Smith | ||
| President and Treasurer | ||
| Date: | June 25, 2019 | |
| By: | /s/ John J. Burke III | |
| John J. Burke III | ||
| Chief Financial Officer | ||
| Date: | June 25, 2019 | |