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)
Cynthia Lo Bessette, 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: August 31
Date of reporting period: February 28, 2021
| Item 1. | Reports to Stockholders |
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.
© 2021 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-PORT. Forms N-PORT are available on the SEC’s web site at http://www.sec.gov. A fund’s Forms N-PORT 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.
| Semi-Annual Report | 3 |
Note to
Shareholders:
Early in 2020, the outbreak and
spread of a new coronavirus emerged as a public health emergency that had a major influence on financial markets, primarily based on its impact on the global economy and the outlook for corporate earnings. The virus causes a respiratory disease
known as COVID-19. On March 11, 2020 the World Health Organization declared the COVID-19 outbreak a pandemic, citing sustained risk of further global spread.
In the weeks following, as the crisis worsened, we
witnessed an escalating human tragedy with wide-scale social and economic consequences from coronavirus-containment measures. The outbreak of COVID-19 prompted a number of measures to limit the spread, including travel and border restrictions,
quarantines, and restrictions on large gatherings. In turn, these resulted in lower consumer activity, diminished demand for a wide range of products and services, disruption in manufacturing and supply chains, and – given the wide variability
in outcomes regarding the outbreak – significant market uncertainty and volatility. Amid the turmoil, global governments and central banks took unprecedented action to help support consumers, businesses, and the broader economies, and to limit
disruption to financial systems.
The situation
continues to unfold, and the extent and duration of its impact on financial markets and the economy remain highly uncertain. Extreme events such as the coronavirus crisis are "exogenous shocks" that can have significant adverse effects on mutual
funds and their investments. Although multiple asset classes may be affected by market disruption, the duration and impact may not be the same for all types of assets.
Fidelity is committed to helping you stay informed
amid news about COVID-19 and during increased market volatility, and we’re taking extra steps to be responsive to customer needs. We encourage you to visit our websites, where we offer ongoing updates, commentary, and analysis on the markets
and our funds.
| 4 | Semi-Annual Report |
Schedule of
Investments February 28, 2021 (Unaudited)
Showing Percentage of Net Assets
See accompanying notes which are an integral part of the
financial statements.
| 6 | Semi-Annual Report |
Schedule of
Investments (Unaudited)–continued
See accompanying notes which are an integral part of the
financial statements.
| Semi-Annual Report | 7 |
Schedule of
Investments (Unaudited)–continued
See accompanying notes which are an integral part of the
financial statements.
| Semi-Annual Report | 9 |
See accompanying notes which are an integral part of the
financial statements.
| 10 | Semi-Annual Report |
Schedule of
Investments (Unaudited)–continued
See accompanying notes which are an integral part of the
financial statements.
| Semi-Annual Report | 11 |
See accompanying notes which are an integral part of the
financial statements.
| 12 | Semi-Annual Report |
Schedule of
Investments (Unaudited)–continued
See accompanying notes which are an integral part of the
financial statements.
| Semi-Annual Report | 13 |
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 | $6,603 |
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.
The value, beginning of period, for the Fidelity Cash Central
Fund was $6,883,841. Net realized gain (loss) and change in net unrealized appreciation (depreciation) on Fidelity Cash Central Fund is presented in the Statement of Operations, if applicable. Purchases and sales of the Fidelity Cash Central Fund
were $99,792,348 and $67,866,523, respectively, during the period.
Investment Valuation
The following is a summary of the inputs used, as of February
28, 2021, involving the Fund's assets and liabilities carried at fair value. 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, and their aggregation into the levels used in the table below, please refer to the Investment Valuation section in the accompanying Notes to Financial Statements.
Valuation Inputs at Reporting Date:
| Description | Total | Level 1 | Level 2 | Level 3 |
| Investments in Securities: | ||||||||
| Corporate Bonds | $ 183,755,938 | $ — | $ 183,755,938 | $ — | ||||
| Money Market Funds | 38,809,425 | 38,809,425 | — | — | ||||
| Total Investments in Securities: | $ 222,565,363 | $ 38,809,425 | $ 183,755,938 | $ — |
Other Information
Distribution of investments by country or territory of
incorporation, as a percentage of Total Net Assets, is as follows (Unaudited):
| United States of America | 92.6 |
| Canada | 6.1 |
| Australia | 1.8 |
| Cayman Islands | 1.0 |
| Others (Individually Less Than 1%) | 3.4 |
| 104.9% |
See accompanying notes which are an integral part of the financial
statements.
| 14 | Semi-Annual Report |
Financial Statements
Statements of Assets and Liabilities
February 28, 2021 (Unaudited)
| Assets | |
| Investments in securities, at value – See accompanying schedule: | |
| Unaffiliated issuers | $183,755,938 |
| Fidelity Central Funds | 38,809,425 |
| Total Investments in Securities | $222,565,363 |
| Receivable for investments sold | |
| Regular delivery | 2,056,563 |
| Distributions receivable from Fidelity Central Funds | 1,736 |
| Interest receivable | 2,289,446 |
| Total assets | 226,913,108 |
| Liabilities | |
| Payable for investments purchased | |
| Regular delivery | 4,838,739 |
| Delayed delivery | 9,235,000 |
| Distributions payable | 642,950 |
| Accrued management fees | 75,214 |
| Total liabilities | 14,791,903 |
| Net Assets | $212,121,205 |
| Net Assets consist of: | |
| Paid in capital | 205,636,713 |
| Total accumulated earnings (loss) | 6,484,492 |
| Net Assets | $212,121,205 |
| Shares outstanding | 3,850,000 |
| Net Asset Value per share | $ 55.10 |
| Investments at cost – Unaffiliated issuers | $180,528,266 |
| Investments at cost – Fidelity Central Funds | 38,809,425 |
| Investments at cost | $219,337,691 |
See accompanying notes which are an integral part of the financial
statements.
| Semi-Annual Report | 15 |
Statements of Operations
For the six months ended February 28, 2021
(Unaudited)
| Investment Income | |
| Interest | $ 3,671,960 |
| Income from Fidelity Central Funds | 6,603 |
| Total income | 3,678,563 |
| Expenses | |
| Management fees | 352,338 |
| Independent trustees' fees and expenses | 323 |
| Total expenses before reductions | 352,661 |
| Expense reductions | (45) |
| Total expenses | 352,616 |
| Net investment income (loss) | 3,325,947 |
| Realized and Unrealized Gain (Loss) | |
| Net realized gain (loss) on investment securities | 4,106,045 |
| Net realized gain (loss) on Fidelity Central Funds | (241) |
| Total net realized gain (loss) | 4,105,804 |
| Change in net unrealized appreciation (depreciation) on investment securities | (387,693) |
| Net gain (loss) | 3,718,111 |
| Net increase (decrease) in net assets resulting from operations | $ 7,044,058 |
See accompanying notes which are an integral part of the financial
statements.
| 16 | Semi-Annual Report |
Financial Statements – continued
Statements of Changes in Net Assets
| Six
months ended February 28, 2021 (Unaudited) |
Year
ended August 31, 2020 | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net investment income (loss) | $ 3,325,947 | $ 4,815,932 | |
| Net realized gain (loss) | 4,105,804 | 1,618,162 | |
| Change in net unrealized appreciation (depreciation) | (387,693) | 2,199,562 | |
| Net increase (decrease) in net assets resulting from operations | 7,044,058 | 8,633,656 | |
| Distributions to shareholders | (5,657,850) | (5,165,200) | |
| Share transactions | |||
| Proceeds from sales of shares | 96,313,776 | 52,988,374 | |
| Cost of shares redeemed | — | (10,051,764) | |
| Net increase (decrease) in net assets resulting from share transactions | 96,313,776 | 42,936,610 | |
| Total increase (decrease) in net assets | 97,699,984 | 46,405,066 | |
| Net Assets | |||
| Beginning of period | 114,421,221 | 68,016,155 | |
| End of period | $212,121,205 | $114,421,221 | |
| Other Information | |||
| Shares | |||
| Sold | 1,750,000 | 1,000,000 | |
| Redeemed | — | (200,000) | |
| Net increase (decrease) | 1,750,000 | 800,000 |
See accompanying notes which are an integral part of the financial
statements.
| Semi-Annual Report | 17 |
Financial Highlights
| Six
months ended February 28, 2021 (Unaudited) |
Year
ended August 31, 2020 |
Year
ended August 31, 2019 |
Year
ended August 31, 2018A | ||||
| Selected Per-Share Data | |||||||
| Net asset value, beginning of period | $ 54.49 | $ 52.32 | $ 50.21 | $ 50.00 | |||
| Income from Investment Operations | |||||||
| Net investment income (loss)B | 1.169 | 2.518 | 2.589 | 0.578 | |||
| Net realized and unrealized gain (loss) | 1.379 | 2.323 | 2.006 | 0.209 | |||
| Total from investment operations | 2.548 | 4.841 | 4.595 | 0.787 | |||
| Distributions from net investment income | (1.128) | (2.429) | (2.485) | (0.577) | |||
| Distributions from net realized gain | (0.808) | (0.242) | — | — | |||
| Total distributions | (1.936) | (2.671) | (2.485) | (0.577) | |||
| Net asset value, end of period | $ 55.10 | $ 54.49 | $ 52.32 | $ 50.21 | |||
| Total ReturnC,D,E | 4.75% | 9.61% | 9.48% | 1.59% | |||
| Ratios to Average Net AssetsF,G | |||||||
| Expenses before reductions | .46% H,I | .45% | .44% I | .45% H | |||
| Expenses net of fee waivers, if any | .46% H,I | .45% | .44% I | .45% H | |||
| Expenses net of all reductions | .46% H,I | .45% | .44% I | .45% H | |||
| Net investment income (loss) | 4.32% H,I | 4.84% | 5.03% | 5.21% H | |||
| Supplemental Data | |||||||
| Net assets, end of period (000 omitted) | $212,121 | $114,421 | $68,016 | $12,553 | |||
| Portfolio turnover rateJ | 98% K,L | 179% L | 76% | 8% K |
| A | For the period June 12, 2018 (commencement of operations) to August 31, 2018. |
| B | Calculated based on average shares outstanding during the period. |
| C | Based on net asset value. |
| D | Total returns for periods of less than one year are not annualized. |
| E | Total returns would have been lower if certain expenses had not been reduced during the applicable periods shown. |
| F | Expense ratios reflect operating expenses of the class. Expenses before reductions do not reflect amounts reimbursed, waived, or reduced through arrangements with the investment advisor, brokerage services, or other offset arrangements, if applicable, and do not represent the amount paid by the class during periods when reimbursements, waivers or reductions occur. |
| G | Fees and expenses of any underlying mutual funds or exchange-traded funds (ETFs) are not included in the Fund’s expense ratio. The Fund indirectly bears its proportionate share of these expenses. For additional expense information related to investments in Fidelity Central Funds, please refer to the "Investments in Fidelity Central Funds" note found in the Notes to Financial Statements section of the most recent Annual or Semi-Annual report. |
| H | Annualized. |
| I | The size and fluctuation of net assets and expense amounts may cause ratios to differ from contractual rates. |
| J | Amount does not include the portfolio activity of any underlying mutual funds or exchange-traded funds (ETFs). |
| K | Amount not annualized. |
| L | Portfolio turnover rate excludes securities received or delivered in-kind. |
See accompanying notes which are an integral part of the financial
statements.
| 18 | Semi-Annual Report |
Notes to Financial Statements
For the period ended February 28, 2021 (Unaudited)
For the period ended February 28, 2021 (Unaudited)
1. Organization.
Fidelity High Yield Factor ETF (the Fund) is an
exchange-traded fund of Fidelity Covington Trust (the Trust) and is 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.
2. Investments in Fidelity Central Funds.
The Fund invests 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 Fund's Schedule of Investments lists each of the Fidelity Central Funds held as of period
end, if any, as an investment of the Fund, but does not include the underlying holdings of each Fidelity Central Fund. As an Investing Fund, the 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 the investment adviser. Annualized expenses of the Money Market Central Funds as of their most recent shareholder report date ranged from less than .005% to .01%.
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.
The 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 – Investment 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 Fund:
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
the Fund’s investments to the Fair Value Committee (the Committee) established by the Fund’s investment adviser. In accordance with valuation policies and procedures approved by the Board, the 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, changes in interest rates and credit quality. The frequency with which these
procedures are used cannot be predicted and they may be utilized to a significant extent. The Committee oversees the 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 the Fund’s investments and ratifies the fair value determinations of the Committee.
The 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 the Fund’s
investments by major category are as follows:
Debt securities, including restricted securities,
are valued based on evaluated prices received from third party pricing vendors or from brokers who make markets in such securities. Corporate bonds are valued by pricing vendors who utilize matrix pricing which considers yield or price of bonds of
comparable quality, coupon, maturity and type or by broker-supplied prices. When independent prices are unavailable or unreliable, debt securities may be valued utilizing pricing methodologies which consider similar factors that would be used by
third party pricing vendors. For foreign debt securities, when significant market or security specific events arise, valuations may be determined in good faith in accordance with procedures adopted by the Board. Debt securities are generally
categorized as Level 2 in the hierarchy but may be Level 3 depending on the circumstances. The Fund invests a significant portion of its assets in below investment grade securities. The value of these securities can be more volatile due to changes
in the credit quality of the issuer and is sensitive to changes in economic, market and regulatory conditions.
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.
Changes in valuation techniques may result in
transfers in or out of an assigned level within the disclosure hierarchy. The aggregate value of investments by input level, as of February 28, 2021, is included at the end of the Fund’s Schedule of Investments.
| Semi-Annual Report | 19 |
3. Significant Accounting
Policies – continued
Investment Transactions and Income. For financial reporting purposes, the Fund's investment holdings and NAV include trades executed through the end of the last business day of the period. The NAV per share for processing shareholder transactions is calculated as of the close of business (normally 4:00 p.m. Eastern time) of NYSE Arca 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 and may include proceeds received from litigation. Income and capital gain distributions from Fidelity Central Funds, if any, are recorded on the ex-dividend date. Interest income is accrued as earned and includes coupon interest and amortization of premium and accretion of discount on debt securities as applicable. Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful based on consistently applied procedures. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectability of interest is reasonably assured.
Investment Transactions and Income. For financial reporting purposes, the Fund's investment holdings and NAV include trades executed through the end of the last business day of the period. The NAV per share for processing shareholder transactions is calculated as of the close of business (normally 4:00 p.m. Eastern time) of NYSE Arca 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 and may include proceeds received from litigation. Income and capital gain distributions from Fidelity Central Funds, if any, are recorded on the ex-dividend date. Interest income is accrued as earned and includes coupon interest and amortization of premium and accretion of discount on debt securities as applicable. Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful based on consistently applied procedures. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectability of interest is reasonably assured.
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, the 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. The Fund files a U.S. federal tax return, in addition to state and local tax returns as required. The 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.
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 prior
period premium and discount on debt securities, redemptions in kind 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:
| Tax cost | Gross
unrealized appreciation |
Gross
unrealized depreciation |
Net
unrealized appreciation (depreciation) on securities and other investments | |
| Fidelity High Yield Factor ETF | $ 219,343,477 | $ 4,396,278 | $ (1,174,392) | $ 3,221,886 |
Delayed Delivery Transactions and When-Issued Securities. During the period, certain Funds transacted in securities on a delayed delivery or when-issued basis. Payment and delivery may take place after the customary settlement period for that
security. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Securities purchased on a delayed delivery or when-issued basis are identified as
such in the Schedule of Investments. Compensation for interest forgone in the purchase of a delayed delivery or when-issued debt security may be received. With respect to purchase commitments, each applicable Fund identifies securities as segregated
in its records with a value at least equal to the amount of the commitment. Payables and receivables associated with the purchases and sales of delayed delivery securities having the same coupon, settlement date and broker are offset. Delayed
delivery or when-issued securities that have been purchased from and sold to different brokers are reflected as both payables and receivables in the Statement of Assets and Liabilities under the caption "Delayed delivery", as applicable. Losses may
arise due to changes in the value of the underlying securities or if the counterparty does not perform under the contract’s terms, or if the issuer does not issue the securities due to political, economic, or other factors.
Restricted Securities (including Private Placements). The Fund 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
the Fund's Schedule of Investments.
| 20 | Semi-Annual Report |
Notes to Financial Statements – continued
4. Purchases and Sales of Investments.
Purchases and sales of securities, other than
short-term securities, U.S. government securities and in-kind transactions, are noted in the table below.
| Purchases | Sales | |
| Fidelity High Yield Factor ETF | $ 142,334,535 | $ 157,674,309 |
Securities received and delivered in-kind through
subscriptions and redemptions are noted in the table below.
| In-kind
Subscriptions |
In-kind
Redemptions | |
| Fidelity High Yield Factor ETF | $ 87,784,193 | $ — |
5. Fees and Other Transactions with Affiliates.
Management Fee. Fidelity Management & Research Company LLC (the investment adviser) provides the Fund with investment management related services for which the Fund pays a monthly management fee that is
based on an annual rate of .45% of average net assets. Under the management contract, the investment adviser pays all other expenses, except the compensation of the independent Trustees and certain miscellaneous expenses such as proxy and
shareholders meeting expenses.
Interfund Trades. Funds may purchase from or sell securities to other Fidelity Funds 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. Any 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 the Fund’s
custodian, credits realized as a result of certain uninvested cash balances were used to reduce the Fund’s expenses by $45.
7. Share Transactions.
The Fund issues and redeems 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 securities and cash to the Fund and redemption proceeds are paid with a basket of securities from
the 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. The 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 the Fund. The transaction fee is used to defray the costs associated with the issuance and redemption of Creation Units.
8. Other.
The Fund’s 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 Fund. In the normal course of business, the Fund may also enter into contracts that provide
general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
9. Coronavirus (COVID-19) Pandemic.
An outbreak of COVID-19 first detected in China
during December 2019 has since spread globally and was declared a pandemic by the World Health Organization during March 2020. Developments that disrupt global economies and financial markets, such as the COVID-19 pandemic, may magnify factors that
affect the Funds’ performance.
| Semi-Annual Report | 21 |
Shareholder Expense Example
(Unaudited)
As a shareholder, you incur two types of costs: (1)
transaction costs, which may include sales charges (loads) on purchase payments or redemption proceeds, as applicable and (2) ongoing costs, which generally include management fees, distribution and/or service (12b-1) 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 mutual funds.
The Example is based on an investment of $1,000
invested for the one-half year period (September 1, 2020 to February 28, 2021).
Actual Expenses
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 a class/Fund under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your
account during this period. If any fund is a shareholder of any underlying mutual funds or exchange-traded funds (ETFs) (the Underlying Funds), such fund indirectly bears its proportional share of the expenses of the Underlying Funds in addition to
the direct expenses incurred presented in the table. These fees and expenses are not included in the annualized expense ratio used to calculate the expense estimate in the table below.
Hypothetical Example for Comparison Purposes
The second line of the accompanying table provides
information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the 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. If any fund is a shareholder of any Underlying Funds, such fund indirectly bears its proportional share of the expenses of the Underlying Funds in addition to
the direct expenses as presented in the table. These fees and expenses are not included in the annualized expense ratio used to calculate the expense estimate 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 September 1, 2020 |
Ending
Account Value February 28, 2021 |
Expenses
Paid During PeriodB September 1, 2020 to February 28, 2021 | |
| Fidelity High Yield Factor ETF | 0.46% | |||
| Actual | $ 1,000.00 | $ 1,047.50 | $ 2.34 | |
| Hypothetical C | $ 1,000.00 | $ 1,022.51 | $ 2.31 |
| A | Annualized expense ratio reflects expenses net of applicable fee waivers. |
| B | Expenses are equal to the annualized expense ratio, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). The fees and expenses of any Underlying Funds are not included in each annualized expense ratio. |
| C | 5% return per year before expenses. |
| 22 | Semi-Annual Report |
Board Approval of Investment
Advisory Contracts
Fidelity High Yield Factor ETF
At its January 2021 meeting, the Board of Trustees,
including the Independent Trustees (together, the Board), voted to continue the management contract with Fidelity Management & Research Company LLC (FMR), and the sub-advisory agreements and sub-subadvisory agreements, in each case, where
applicable (together, the Advisory Contracts) for the fund for four months from February 1, 2021 through May 31, 2021, in connection with changes to the Board’s meeting calendar.
The Board considered that the approval of the
fund’s Advisory Contracts will not result in any changes in (i) the investment process or strategies employed in the management of the fund’s assets; (ii) the fees and expenses paid by shareholders; (iii) the nature, extent or quality of
services provided under the fund’s Advisory Contracts; or (iv) the day-to-day management of the fund or the persons primarily responsible for such management. The Board also considered that since its last approval of the fund’s Advisory
Contracts, FMR had provided additional information on the fund in support of the annual contract renewal process, including competitive analyses on total expenses and management fees and in-depth reviews of fund performance and fund profitability
information. The Board also considered the findings of certain ad hoc committees that had been previously formed to discuss matters relevant to all of the Fidelity funds, including economies of scale, fall-out benefits and retail vs. institutional
funds. The Board concluded that the fund’s Advisory Contracts are fair and reasonable, and that the fund’s Advisory Contracts should be renewed, without modification, through May 31, 2021, with the understanding that the Board will
consider the annual renewal for a full one year period in May 2021.
In connection with its consideration of future
renewals of the fund’s Advisory Contracts, the Board will consider: (i) the nature, extent and quality of services provided to the funds, including shareholder and administrative services and investment performance; (ii) the competitiveness of
the management fee and total expenses for the fund; (iii) the costs of the services and profitability, including the revenues earned and the expenses incurred in conducting the business of developing, marketing, distributing, managing,
administering, and servicing the fund and its shareholders, to the extent applicable; and (iv) whether there have been economies of scale in respect of the Fidelity funds, whether the Fidelity funds (including the fund) have appropriately benefited
from any such economies of scale, and whether there is the potential for realization of any further economies.
Based on its evaluation of all of the conclusions
noted above, and after considering all factors it believed relevant, the Board ultimately concluded that the fund’s management fee structure is fair and reasonable, and that the continuation of the fund’s Advisory Contracts should be
approved for four months from February 1, 2021 through May 31, 2021.
| Semi-Annual Report | 23 |
Liquidity Risk Management
Program
The Securities and Exchange Commission adopted Rule
22e-4 under the Investment Company Act of 1940 (the Liquidity Rule) to promote effective liquidity risk management throughout the open-end investment company industry, thereby reducing the risk that funds will be unable to meet their redemption
obligations and mitigating dilution of the interests of fund shareholders.
The Fund has adopted and implemented a liquidity
risk management program pursuant to the Liquidity Rule (the Program) effective December 1, 2018. The Program is reasonably designed to assess and manage the Fund’s liquidity risk and to comply with the requirements of the Liquidity Rule. The
Fund’s Board of Trustees (the Board) has designated the Fund’s investment adviser as administrator of the Program. The Fidelity advisers have established a Liquidity Risk Management Committee (the LRM Committee) to manage the Program for
each of the Fidelity Funds. The LRM Committee monitors the adequacy and effectiveness of implementation of the Program and on a periodic basis assesses each Fund’s liquidity risk based on a variety of factors including (1) the Fund’s
investment strategy, (2) portfolio liquidity and cash flow projections during normal and reasonably foreseeable stressed conditions, (3) shareholder redemptions, (4) borrowings and other funding sources and (5) in the case of exchange-traded funds,
certain additional factors including the effect of the Fund’s prices and spreads, market participants, and basket compositions on the overall liquidity of the Fund’s portfolio, as applicable.
In accordance with the Program, each of the
Fund’s portfolio investments is classified into one of four liquidity categories described below based on a determination of a reasonable expectation for how long it would take to convert the investment to cash (or sell or dispose of the
investment) without significantly changing its market value.
Highly liquid
investments – cash or convertible to cash within three business days or less
Moderately
liquid investments – convertible to cash in three to seven calendar days
Less liquid
investments – can be sold or disposed of, but not settled, within seven calendar days
Illiquid
investments – cannot be sold or disposed of within seven calendar days
Liquidity classification determinations take into
account a variety of factors including various market, trading and investment-specific considerations, as well as market depth, and generally utilize analysis from a third-party liquidity metrics service.
The Liquidity Rule places a 15% limit on a
fund’s illiquid investments and requires funds that do not primarily hold assets that are highly liquid investments to determine and maintain a minimum percentage of the fund’s net assets to be invested in highly liquid investments
(highly liquid investment minimum or HLIM). The Program includes provisions reasonably designed to comply with the 15% limit on illiquid investments and for determining, periodically reviewing and complying with the HLIM requirement as
applicable.
At a recent meeting of the
Fund’s Board of Trustees, the LRM Committee provided a written report to the Board pertaining to the operation, adequacy, and effectiveness of implementation of the Program for the annual period from December 1, 2019 through November 30, 2020.
The report concluded that the Program has been implemented and is operating effectively and is reasonably designed to assess and manage the Fund’s liquidity risk.
| 24 | Semi-Annual Report |
HIE-SANN-0421
1.9887635.102
Corporate Headquarters
245 Summer St., Boston, MA 02210
www.fidelity.com
| 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
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 |
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: | April 21, 2021 | |
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: | April 21, 2021 | |
| By: | /s/ John J. Burke III | |
| John J. Burke III | ||
| Chief Financial Officer | ||
| Date: | April 21, 2021 | |