Conventional investing wisdom often frames buying bonds as a straightforward means of achieving both safety and income.
At first glance it seems relatively simple: You lend money to a government entity through Treasurys or to a corporation via corporate bonds, and in return, it promises to pay back the principal on a specified date along with periodic interest payments.
However, the reality of investing in bonds is far more complex than it initially appears. Purchasing individual bonds involves navigating the over-the-counter market, where unlike stocks, there isn’t a centralized pricing mechanism.
This lack of standardization means that investors themselves are responsible for valuing the bonds, a task that requires calculating and interpreting key fixed income metrics.
For instance, duration is a measure of a bond’s sensitivity to interest rate changes, indicating how much the bond’s price is expected to fluctuate as interest rates vary. Yield to maturity, on the other hand, represents the total return expected on a bond if it is held until it matures.
Another practical challenge with individual bonds is the frequency of income. Bonds typically pay out interest semi-annually, which may not align with the regular income needs of some investors.
Furthermore, investing in bonds is akin to making a loan, and just as a defaulting friend can leave you in a lurch, so too can a company that fails to meet its payment obligations.
This is where bond funds come into play, offering a convenient solution to many of these challenges. These funds provide diversification among different issuers, maturities and credit qualities, thereby reducing the individual risks associated with single bond investments.
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They are also easily accessible through brokerage accounts and usually distribute payments on a monthly basis, which can be more aligned with the income needs of investors.
Finally, bond funds have the advantage of having their key metrics calculated and readily available, allowing investors to easily examine and interpret the fund’s potential risk and return profile.
Here are seven of the best income-oriented Fidelity bond funds to buy in 2023, selected from a lineup of 54 mutual funds and 11 exchange-traded funds, or ETFs. All funds selected have a 30-day SEC yield of 6% or higher:
| Fidelity Fund | Expense Ratio | 30-day SEC yield |
| Fidelity New Markets Income Fund (ticker: FNMIX) | 0.82% | 6.4% |
| Fidelity High Income Fund (SPHIX) | 0.87% | 7.7% |
| Fidelity Global High Income Fund (FGHNX) | 0.80% | 6.9% |
| Fidelity Short Duration High Income Fund (FSAHX) | 0.75% | 7.3% |
| Fidelity Floating Rate High Income Fund (FFRHX) | 0.73% | 9.0% |
| Fidelity High Yield Factor ETF (FDHY) | 0.45% | 7.1% |
| Fidelity Sustainable High Yield ETF (FSYD) | 0.55% | 7.6% |
Fidelity New Markets Income Fund (FNMIX)
One of the key factors influencing a bond’s yield is the creditworthiness of the issuer. For instance, U.S. government-issued Treasurys are rated very highly due to a low probability of default. In contrast, the bonds of foreign emerging market countries like Venezuela, Indonesia, Turkey and Brazil may be rated much lower. To compensate for this, emerging market bonds will often pay out higher yields.
To access emerging market bonds, fixed income investors can buy FNMIX. This mutual fund holds bonds from all the aforementioned countries, in addition others like Colombia, South Africa and Saudi Arabia. The fund features a sizable allocation to bonds rated BB and below, which are known as “junk bonds” or “high-yield bonds.” FNMIX pays a 6.4% 30-day SEC yield and charges a 0.82% expense ratio.
Fidelity High Income Fund (SPHIX)
“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. By opting for a high-yield bond fund, investors are consciously taking on additional credit risk.
Consider SPHIX, which is able to invest not only in high-yield bonds, but also hybrid fixed-income instruments like preferred shares and convertible bonds. Right now, this fund has a sizable 35% and 44% allocation to debt rated BB and B, respectively, but in exchange for the higher risk pays out a high 7.7% 30-day SEC yield. SPHIX charges a 0.87% expense ratio.
Fidelity Global High Income Fund (FGHNX)
Bond investors who prefer a degree of international diversification can opt for FGHNX, the globally diversified counterpart to SPHIX. This fund features a 61% weight to U.S. high-yield bonds, a 13% allocation to European bonds, an 18% weight to emerging markets and 8.5% to the Asian market. As with SPHIX, the majority of the bonds in this fund are rated BB or B, which are non-investment-grade.
Overall, FGHNX is similar to SPHIX in terms of income potential, sporting a 6.9% 30-day SEC yield. Because the interest rate and economies of different nations don’t always move in sync, FGHNX could be a good way to diversify a bond allocation against the risks unique to the U.S. fixed income market. The fund charges a 0.8% net expense ratio, slightly cheaper than SPHIX.
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.”
Income investors looking to reduce downside risk from rising rates may prefer a short-duration bond fund like FSAHX. With an average duration of just 2.2 years, this fund is expected to fall just 2.2% if rates rose by 100 basis points, all else being equal. Otherwise, it’s a fairly standard high-yield bond fund, holding both U.S. and international bonds of mostly BB and B ratings and paying a 7.3% 30-day SEC yield.
[READ: 9 of the Best REITs to Buy for 2024]
Fidelity Floating Rate High Income Fund (FFRHX)
Most bonds have their coupon rates fixed when issued, with the yields ultimately received by end investors fluctuating depending on the price at which they purchased the bond. However, some special types of bonds pay a variable coupon rate based on a benchmark plus a spread. These bonds are known as “floating-rate bonds,” and can benefit in a “higher-for-longer” interest rate environment.
Fidelity’s offering here is FFRHX, which primarily holds a portfolio of term and revolving loans characterized by shorter maturities. The result is an ultra-low duration of just 0.2 years, but a high 9% 30-day SEC yield thanks to a combination of high interest rates and compensation for the lower credit quality of the bonds, 64% of which are rated B. The fund charges a 0.68% expense ratio.
Fidelity High Yield Factor ETF (FDHY)
Bond income investors looking for greater flexibility may prefer FDHY, which as an ETF allows for intraday trading and real-time price updates. This actively managed ETF targets non-investment-grade bonds assessed by Fidelity to provide above-average income and a degree of capital appreciation. Compared to the previous mutual funds, FDHY is also significantly cheaper with a 0.45% expense ratio.
FDHY’s portfolio is primarily concentrated in 347 North American high-yield bonds with short-to-intermediate maturities. As a bond ETF, FDHY pays on a monthly basis, with the most recent ex-dividend date occurring as of Dec. 27, 2023. Currently, investors can expect a 7.1% 30-day SEC yield. So far, this ETF has accrued some $256 million in assets under management, or AUM.
Fidelity Sustainable High Yield ETF (FSYD)
Environmental, social and governance, or ESG, minded investors can find unique offerings among Fidelity’s bond fund lineup, too. An ideal pick could be FSYD, which actively manages a portfolio of high-yield bonds issued by companies deemed to have proven or improving sustainability. This currently includes 289 bonds from companies like Uber Technologies Inc. (UBER) and Carnival Corp. (CCL).
As with FDHY, investors can expect a heavy North American focus along with a short-to-intermediate maturity with the fund’s holdings. However, the additional requirement of sustainability screening contributes to a higher 0.55% expense ratio for FSYD compared to FDHY. At present, investors can expect a 7.6% 30-day SEC yield along with monthly distributions.
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7 of the Best Fidelity Bond Funds to Buy for Steady Income originally appeared on usnews.com
Update 01/05/24: This story was previously published at an earlier date and has been updated with new information.
