7 of the Best Fidelity Bond Funds to Buy

With their lower volatility, it still makes sense to diversify your portfolio with bonds.

The stock market saw large returns over the past year, but bond investors didn’t reap as many rewards. In 2021, the Morningstar Core Bond Index lost 1.61%. According to Dave Sekera, chief U.S. market strategist for Morningstar, this was the first decline the index has seen since 2013. Sekera says that in 2022 the “outlook is similar to what we expected for (2021).” Sekera sees bonds continuing to receive “pressure from rising interest rates as the economy works its way toward a recovery from the pandemic.” According to Elizabeth Foos, associate director of fixed income strategies at Morningstar, municipal bonds, which carry tax advantages, “had really strong demand in 2021.” This drove prices higher despite inflationary pressures. Of course, nobody knows yet what 2022 will bring, but with expected volatility in the stock market, investors would do well to hedge against uncertainty with bonds and the income stream they provide. Here are seven of the best Fidelity bond funds.

Fidelity Tax-Free Bond Fund (ticker: FTABX)

FTABX invests primarily in investment-grade municipal securities with interest exempt from federal tax. Of course, the municipal markets can be volatile, and adverse tax, legislative or political changes in the issuer can sometimes lead to poor returns. Not to mention, the dividends in this fund could still be subject to some forms of taxation, depending on your situation. However, Morningstar qualitative analysts give this fund a gold rating, meaning that analysts expect it to outperform its benchmarks over a five-year period. In an analyst note for Morningstar, Foos says that “the strategy’s consistent and distinctive approach and attractive price tag will help it keep an edge over peers.” And with a net expense ratio of 0.25%, that’s only a $25 fee for every $10,000 invested per year. This fund has a one-year total return of 1.69%, a three-year total return of 4.95% and a five-year total return of 4.3%.

Fidelity Capital & Income Fund (FAGIX)

Morningstar analyst Sam Kulahan calls FAGIX “a very strong performer.” Kulahan also cautions that FAGIX “can do poorly because it’s a risky strategy during credit sell-offs like the COVID sell-off in 2020.” FAGIX has about 70% of its portfolio weighted toward corporate bonds and 20% weighted toward equities. The fund has a bronze rating from Morningstar’s qualitative analysts, meaning it is not as strong as a gold-rated fund but still expected to outperform over five years. And it is the only fund with a five-star quantitative rating from Morningstar on this list, which means it has strong historical performance. With a net expense ratio of 0.68%, FAGIX has a one-year total return of 9.54%, a three-year total return of 11.59% and a five-year total return of 8.45%. All in all, Kulahan says that FAGIX is a “good pick if you’re looking for a more aggressive high-yield fund.”

Fidelity Inflation-Protected Bond Index Fund (FIPDX)

With a four-star quantitative rating from Morningstar, FIPDX is a fixed-income fund that ties about 80% of holdings to the Bloomberg Barclays U.S. Treasury Inflation-Protected Securities Index. This means FIPDX attempts to offer investment results corresponding to the total return of the inflation-protected sector of the U.S. Treasury market. This does make for a volatile investment strategy, however, since the usual relationship between bonds and interest rates can produce even more pronounced results with long-term securities. But this strategy has paid off well for fund managers. The fund has a one-year total return of 5.07%, a three-year total return of 7.54% and a five-year total return of 4.79%. With a 0.05% net expense ratio, the fund can save you money on fees.

Fidelity Intermediate Municipal Income Fund (FLTMX)

“Municipal funds were a strong asset performer in 2021, and it will be difficult to match that in 2022,” Foos says. However, Morningstar’s analysts still give FLTMX a silver rating. With a net expense ratio of 0.34%, FLTMX has a one-year total return of 0.38%, a three-year total return of 3.68% and a five-year total return of 3.3%. Foos considers FLTMX “a strong choice for muni investors.” Like Fidelity’s other municipal funds, FLTMX invests primarily in investment-grade municipal securities with interest exempt from federal income tax. However, FLTMX tries to maintain a dollar-weighted average maturity between 3 and 10 years.

Fidelity Floating Rate High Income Fund (FFRHX)

FFRHX holds companies with low-quality financial conditions. Of course, lower-quality bonds like these can be more volatile and have a higher risk of default. But the flip side is that fund managers have brought in a one-year total return of 5.07%, a three-year total return of 4.53% and a five-year total return of 3.94%. Plus, this fund has been in existence for more than 20 years and has net assets of more than $11 billion. In fact, FFRHX maintains a four-star quantitative rating and a silver qualitative rating from Morningstar. At 0.67%, FFRHX’s net expense ratio is on the higher end of the funds included here.

Fidelity Municipal Income Fund (FHIGX)

As is the case with the other municipal bond funds on this list, FHIGX has seen its team go through some recent transitions. However, Foos says investors don’t need to worry. “Investors remain in good hands,” she says. Veteran manager Kevin Ramundo retired from Fidelity in June 2020. However, Cormac Cullen, Elizah McLaughlin and Michael Maka remain as managers. FHIGX retains a silver rating from Morningstar’s qualitative analysts. With a net expense ratio of 0.45%, the fund has a one-year total return of 1.71%, a three-year total return of 4.82% and a five-year total return of 4.29%.

Fidelity Focused High Income Fund (FHIFX)

FHIFX invests mostly in income-producing debt securities, preferred stocks and convertible securities, placing an emphasis on lower-quality debt securities. This includes securities rated BB by S&P, Ba by Moody’s and similar ratings from other national agencies. Investing in these types of securities can be extremely volatile, and they bring a higher risk of default. FHIFX has a three-star quantitative rating from Morningstar. With a net expense ratio of 0.75%, it’s the most expensive of the funds included here. However, the fund has been in existence since September 2004. And the fund’s managers have brought in a 2.09% one-year total return, a 6.02% three-year total return and a 4.82% five-year total return.

7 of the best Fidelity bond funds:

— Fidelity Tax-Free Bond Fund (FTABX)

— Fidelity Capital & Income Fund (FAGIX)

— Fidelity Inflation-Protected Bond Index Fund (FIPDX)

— Fidelity Intermediate Municipal Income Fund (FLTMX)

— Fidelity Floating Rate High Income Fund (FFRHX)

— Fidelity Municipal Income Fund (FHIGX)

— Fidelity Focused High Income Fund (FHIFX)

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