7 of the Best Fidelity Bond Funds to Buy for Steady Income

Rising interest rates throughout 2022 led to historically high losses for fixed-income investors, but better days for bonds may be on the horizon. With bond yields sitting higher throughout 2023 so far, fixed-income investors could see some significant tailwinds and heightened income potential.

Prior to 2022, investors seeking higher-than-average income potential often turned to riskier assets like dividend stocks, preferred shares and real estate investment trusts, or REITs. However, with even risk-free certificates of deposit yielding upward of 4% these days, fixed-income investments have become more attractive to income-hungry investors.

While investors can buy individual bonds, a more liquid, accessible and less complicated approach might be via a bond mutual fund. These investment vehicles package bonds of various issuers, maturities and credit qualities into a basket, which investors can buy and sell units of.

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By buying a bond mutual fund, investors gain two main benefits over individual bond issues. Compared to individual bonds, bond funds are often easier to price and sell. In addition, most bond funds pay monthly interest, as opposed to the typical semiannual coupon schedule of individual bonds.

When it comes to finding bond funds, a great place to look is Fidelity, which boasts a wide selection of both passive-index and actively managed choices. Fidelity funds are particularly beginner friendly thanks to a combination of low fees, no investment minimums and a lack of sales loads.

Here’s a look at seven of the best Fidelity bond mutual funds to buy in 2023 for income, with varying degrees of credit and interest rate risk suitable for a wide range of investor risk tolerances:

Fidelity Fund 30-Day Yield
Fidelity Focused High Income Fund (ticker: FHIFX) 6.1%
Fidelity Corporate Bond Fund (FCBFX) 5.2%
Fidelity Short Duration High Income Fund (FSAHX) 7.3%
Fidelity Intermediate Treasury Bond Index Fund (FUAMX) 3.5%
Fidelity Municipal Bond Index Fund (FMBIX) 3.1%
Fidelity Conservative Income Bond Fund (FCNVX) 5.1%
Fidelity Floating Rate High Income Fund (FFRHX) 9.1%

Fidelity Focused High Income Fund (FHIFX)

“Generally speaking, higher income comes at greater credit risk because investors need to be compensated for the additional credit-risk premium over comparable Treasury bonds, which are risk free in terms of default,” says Mark Andraos, associate portfolio manager at Regency Wealth Management. For investors seeking to maximize income at the cost of credit risk, FHIFX could work.

This bond fund primarily targets lower-quality, non-investment-grade fixed-income assets with a rating of BB by Standard & Poor’s or Ba by Moody’s. These bonds are known as high-yield, or “junk,” bonds and tend to pay a very high yield to compensate for their greater risk. Case in point: FHIFX currently spits out a 30-day SEC yield of 6.1%. The fund charges a 0.75% expense ratio, or $75 annually for a $10,000 investment.

Fidelity Corporate Bond Fund (FCBFX)

Not all investors have the risk tolerance to own high-yield bonds. Thanks to their lower credit quality, these bonds often possess greater volatility and downside risk, especially during periods of market turmoil. “It is more common to see credit downgrades leading up to a recession,” Andraos says. For a more conservative income-producing bond fund, FCBFX could be a good alternative.

Unlike FHIFX, FCBFX focuses on investment-grade corporate bonds, which hold a rating of BBB or higher from S&P. Currently, 59% of this portfolio is held in BBB-rated corporate bonds, mostly issued by financial sector companies like JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC). Currently, FCBFX pays a 30-day SEC yield of 5.2% and charges a 0.44% expense ratio.

Fidelity Short Duration High Income Fund (FSAHX)

“The other element that influences risk with bond funds is duration,” says Steve Pilloff, associate professor of finance at George Mason University. “When interest rates change, bond prices change more for bonds with longer durations.” This is the reason why longer-duration bonds suffered the worst losses in 2022. To mitigate this, investors can opt for a short-duration fund like FSAHX.

With an average duration of just 2.3 years, FSAHX can be expected to lose around 2.3% in value should interest rates rise by 1 percentage point, all else being equal. Despite the shorter duration, the fund still manages to pay out a competitive 30-day SEC yield of 7.3% thanks to its portfolio of non-investment-grade high-yield bonds and the current inverted yield curve, which has benefited short-term yields. FSAHX charges a 0.75% expense ratio.

[SEE: 9 of the Best Bond ETFs to Buy Now.]

Fidelity Intermediate Treasury Bond Index Fund (FUAMX)

For those not keen to take on excessive credit risk, a Treasury bond fund like FUAMX could be a lower-risk holding in terms of default probability. “Debt issued by the U.S. government is commonly viewed as being the safest, so a bond fund with Treasury securities is considered to have very little credit risk,” Pilloff says. Safety is a highlight of this fund, as 99% of FUAMX’s portfolio consists of U.S.-government-issued Treasurys.

The downside of FUAMX is a relatively higher duration. Right now, the fund possesses a duration of 6.2 years, which makes it more sensitive to interest rate changes. This can be good if rates fall, but bad if rates increase. Currently, FUAMX yields 3.5%, which is lower than its corporate bond cousin given the lower-risk nature of its holdings. However, the fund’s expense ratio is much cheaper at just 0.03%.

Fidelity Municipal Bond Index Fund (FMBIX)

Interest income for bond funds isn’t taxed the most favorably. For investors in a high-income tax bracket, the alluring yield of corporate and junk bond funds can be quickly eroded by taxes. One solution is a tax-exempt bond municipal fund like FMBIX. This exchange-traded fund tracks the Bloomberg Municipal Bond Index, which holds bonds that pay interest exempt from federal income tax.

“For a high-income-earning investor, municipal bond funds may fit as part of an overall bond allocation,” Andraos says. “They offer tax-exempt income on a portion, if not all, of the interest income generated by the bonds.” Another benefit is their relatively high credit rating, with FMBIX mostly comprising AA and AAA bonds. The fund pays a 30-day SEC yield of 3.1% and charges a 0.07% expense ratio.

Fidelity Conservative Income Bond Fund (FCNVX)

“Duration tells us how sensitive a bond fund is to interest rate hikes and is particularly important now as a metric to watch with the ongoing rate hikes,” says Anessa Custovic, chief investment officer at Cardinal Retirement Planning Inc. “Fidelity has many short-duration fixed-income funds so you can try to hedge against rate hikes with short duration, but you don’t have to sacrifice the number of investment options.”

An option that fits this criteria is FCNVX. This bond fund holds an ultrashort duration of just 0.3 years, which effectively immunizes it from interest rate movements. The fund features a high allocation to domestic and foreign short-term corporate bonds from the banking sector, with most possessing a credit rating of A or AA. FCNVX charges a 0.25% expense ratio and pays a 5.1% 30-day SEC yield.

Fidelity Floating Rate High Income Fund (FFRHX)

“My perspective is a bit unorthodox, as we generally do not recommend bond funds to our clients due to their exposure to market risk and greater susceptibility to fluctuations in interest rates,” says Sean August, CEO at The August Wealth Management Group. “Conversely, individual bonds provide return of principal upon maturity, barring any risk of default by the issuer.”

However, August holds a soft spot for FFRHX, which holds floating-rate notes paying interest that moves in lockstep with rate increases. This insulates FFRHX from interest rate fluctuations, while still benefiting from the liquidity of a bond fund. Thanks to rising rates, FFRHX is currently paying a 30-day SEC yield of 9.1%, while sporting a low duration of 0.3 years. The fund charges an expense ratio of 0.68%.

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7 of the Best Fidelity Bond Funds to Buy for Steady Income originally appeared on usnews.com

Update 04/26/23: This story was previously published at an earlier date and has been updated with new information.

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