Income investors often turn to assets like dividend stocks and real estate investment trusts, or REITs, for their needs. However, these assets come with their own set of equity-specific risks.
For instance, dividend stocks might see reduced payouts if the issuing company faces financial difficulties or decides to reinvest profits back into the business.
Likewise, REITs can be affected by fluctuations in the real estate market, changing interest rates or downturns in specific sectors like retail or office spaces.
Another drawback with many of these assets is the payment frequency. A considerable number of dividend stocks and REITs distribute returns on a quarterly basis. For investors who rely on frequent cash flows, such as retirees, quarterly payments can be less than ideal.
[Sign up for stock news with our Invested newsletter.]
To address both the consistency in income and the frequency of distributions, investors can instead turn to bond mutual funds and exchange-traded funds, or ETFs.
These funds offer a variety of choices, targeting bonds of different maturities, geographies and credit qualities. This versatility allows investors to tailor their bond holdings according to their risk tolerance, income needs and market outlook.
A common misconception is that bond funds are just tools for lowering portfolio risk. In practice, they can also serve as reliable sources of steady income.
Most bond funds distribute income on a monthly basis, and the underlying bonds typically produce predictable cash flows. This consistency can be invaluable for those who depend on their investment portfolios for routine income.
For investors seeking a combination of low cost and a diverse selection, Fidelity’s fund lineup could be a compelling pick. Currently, the firm offers 54 bond mutual funds and 11 bond ETFs.
This broad spectrum ensures that most investors can find a bond fund that matches their specific needs and objectives, all while benefiting from Fidelity’s management and research capabilities.
Here are seven of the best income-oriented Fidelity funds to buy in 2023:
| Bond fund | Expense ratio | 30-day SEC yield as of Oct. 20 |
| Fidelity High Yield Factor ETF (ticker: FDHY) | 0.45% | 8.2% |
| Fidelity Corporate Bond Fund (FCBFX) | 0.44% | 6.2% |
| Fidelity Corporate Bond ETF (FCOR) | 0.36% | 6.1% |
| Fidelity Short Duration High Income Fund (FSAHX) | 0.75% | 8.1% |
| Fidelity Floating Rate High Income Fund (FFRHX) | 0.68% | 9.2% |
| Fidelity Municipal Core Plus Bond Fund (FMBAX) | 0.37% | 4.2% |
| Fidelity Sustainable High Yield ETF (FSYD) | 0.55% | 9% |
Fidelity High Yield Factor ETF (FDHY)
“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. The riskiest bonds are known as “high yield” or “junk” bonds and have a greater probability of default.
For exposure to high-yield bonds, investors can buy FDHY, which primarily invests in non-investment grade debt. FDHY’s portfolio currently consists of 338 total bond issues, with some paying coupons as high as 11.6%, such as one issue from Royal Caribbean Group Ltd. (RCL). The ETF pays an overall 30-day SEC yield of 8.2% and charges a 0.45% expense ratio.
Fidelity Corporate Bond Fund (FCBFX)
Between high-yield bonds and Treasurys sit the majority of investment-grade corporate bonds. These bonds are rated BBB or higher from one or more of the three major credit rating agencies and offer a balanced blend of credit risk and income potential. Because trading individual corporate bond issues can be illiquid, investors may find it easier to access them through a fund like FCBFX.
Around 59% of FCBFX is invested in corporate-issued bonds rated BBB, with the next highest being A-rated issues at 25%. The fund is globally diversified, albeit with a bias toward U.S. issuers at 74% of its portfolio. At present, the fund is paying out a 30-day SEC yield of 6.2% against a 0.44% expense ratio. Like many Fidelity mutual funds, FCBFX has no transaction fees or minimum investment requirements.
Fidelity Corporate Bond ETF (FCOR)
Investors seeking low fees can consider FCOR in lieu of FCBFX. Like FCBFX, FCOR primarily holds investment grade corporate bonds, but with a slightly lower 0.36% expense ratio. As an ETF, the minimum investment for FCOR is the price of a single share, which currently sits at around $43. This ETF is actively managed, meaning that it does not replicate the composition of a benchmark bond index.
FCOR’s portfolio currently consists of around 84% in investment-grade, BBB-or-higher rated corporate bonds, along with a smaller 13% allocation to AAA-rated bonds like U.S. Treasurys. As with its mutual fund counterpart, the ETF is biased toward U.S. issuers at around 78% of its portfolio. Investors in FCOR can currently expect a 6.1% 30-day SEC yield and a 6.8-year duration.
Fidelity Short Duration High Income Fund (FSAHX)
“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.”
A great example is FSAHX, which holds a portfolio of high-yield bonds averaging around 2.1 years in duration. All else being equal, the fund is only expected to lose 2.1% in value should interest rates rise by 100 basis points. This makes the fund a possible choice for a low-risk investor looking to minimize interest rate risk. FSAHX currently pays an 8.1% 30-day SEC yield and charges a 0.75% expense ratio.
[What to Invest In When Interest Rates Peak]
Fidelity Floating Rate High Income Fund (FFRHX)
Lowering duration can help investors mitigate the negative effects of a rising interest rate environment. However, investors can also directly benefit from rising rates via floating-rate bonds. Unlike regular bonds, these bonds pay a variable interest rate usually pegged to a benchmark like the federal funds rate or the secured overnight financing rate.
A great example is FFRHX, which primarily holds a portfolio of non-investment-grade term and revolving loans with floating rate coupons. As a result, the fund has a very low duration of just 0.2 years, while paying out a high 30-day SEC yield of 9.2% at present. That being said, investors should watch out for credit risk, as the majority of this fund is rated B. FFRHX charges a 0.68% expense ratio.
Fidelity Municipal Core Plus Bond Fund (FMBAX)
“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.” This is especially true for investors who may have maxed out contribution room in a tax-advantaged 401(k) or Roth IRA and are now investing in a regular brokerage account.
Consider FMBAX, which invests in tax-exempt municipal bonds as its “core.” The “plus” side of this fund’s strategy targets high-yield bonds, along with U.S. Treasurys. This strategy is designed to ensure a baseline of performance and tax-efficiency via the “core” portion, while targeting outperformance from the “plus” portion. FMBAX pays a 4.2% 30-day SEC yield and charges a 0.37% expense ratio.
Fidelity Sustainable High Yield ETF (FSYD)
Income investors looking to screen their bond holdings for environmental, social and governance, or ESG, considerations may like FSYD. This ETF targets non-investment-grade bonds issued by companies that Fidelity’s research team believes to have proven or improving sustainability. Right now, investors can expect a 9% 30-day SEC yield and a 0.55% expense ratio.
FSYD’s portfolio currently consists of 267 bond issues, with issuers such as Uber Technologies Inc. (UBER), Carnival Corp. (CCL) and New Fortress Energy Inc. (NFE) represented. Virtually all of its bonds are non-investment-grade at 98%, and the majority (81%) are issued by North America-based companies. As with the previous bond ETFs, FSYD is actively managed and does not track an index.
More from U.S. News
Why Bonds Make Sense for Your Portfolio Now
7 of the Best Fidelity Bond Funds to Buy for Steady Income originally appeared on usnews.com
Update 10/24/23: This story was previously published at an earlier date and has been updated with new information.
