Choosing the best bond fund for steady income involves more than just selecting options with the highest yield or the lowest cost.
For those focused on generating regular income, it’s crucial to find a bond fund that delivers consistent payouts. While individual bonds typically pay semi-annually, most bond funds distribute income monthly. However, some may opt for quarterly payments, potentially leading to less predictable income streams.
Understanding a bond fund’s yield is also key. While total returns can be more accurately gauged through a fund’s yield to maturity — which represents the return expected if all the fund’s underlying bonds are held until it matures — income investors often look at the 30-day SEC yield.
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This metric provides a snapshot of the income generated by the fund’s holdings over the past month, annualized as a percentage of the fund’s net asset value, offering a clear and standardized view of what income investors can expect in the near term.
Credit quality is another crucial factor. Funds holding lower-rated “junk” bonds might offer higher income, but they come with increased risk of default. Thus, a severe market downturn could lead to higher default rates, potentially impacting the fund’s ability to reliably distribute income.
Lastly, choosing between a bond mutual fund and an exchange-traded fund, or ETF, is an important decision. Both types can offer diversification within the bond market, but they differ in key areas like trading mechanics and tax efficiency.
Bond mutual funds trade at a single price at the end of the trading day, while bond ETFs trade throughout the day like stocks, offering more flexibility. ETFs also tend to be more tax-efficient due to their unique structure that allows for in-kind transactions, which can minimize capital gains distributions.
Here are seven of the best income-oriented Fidelity bond funds to buy in 2024, selected from a lineup of 53 mutual funds and 12 ETFs. All funds selected have a 30-day SEC yield of 5.6% or higher.
| Fund | Expense ratio | 30-day SEC yield |
| Fidelity High Yield Factor ETF (ticker: FDHY) | 0.45% | 7% |
| Fidelity High Income Fund (SPHIX) | 0.85% | 7.3% |
| Fidelity New Markets Income Fund (FNMIX) | 0.79% | 6.5% |
| Fidelity Short Duration High Income Fund (FSAHX) | 0.70% | 7% |
| Fidelity Low Duration Bond Factor ETF (FLDR) | 0.15% | 5.6% |
| Fidelity Floating Rate High Income Fund (FFRHX) | 0.72% | 8.7% |
| Fidelity Sustainable High Yield ETF (FSYD) | 0.55% | 7.2% |
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, partner at Regency Wealth Management. Thus, income investors seeking high-yield bond funds must be comfortable with the increased risk of defaults.
However, the higher diversification provided by a bond ETF can somewhat mitigate this. For example, FDHY currently holds over 370 non-investment-grade bonds from companies in sectors such as industrials, energy and materials. Most companies are U.S. based, but there are some Canadian, Australian and U.K. firms present. FDHY pays a 7% 30-day SEC yield and charges a 0.45% expense ratio.
Fidelity High Income Fund (SPHIX)
“The fixed income markets are one of the few markets that are non-exchange-traded, and thus having experience and relationships can create an advantage,” says Jeffrey Kalapos, chief investment officer at Coastal Bridge Advisors. “Therefore, understanding the management team’s investment philosophy, process and past experience is paramount.” These are crucial factors to evaluate before selecting a fund.
For example, many of Fidelity’s higher-yielding bond funds like SPHIX are actively managed. These funds do not track an index — rather, Fidelity’s portfolio team relies on their expertise, research and discretion to pick the right bonds. For SPHIX, this track record dates back to 1990, with an annualized total return of 7.6% since inception. Currently, investors can expect a 7.3% 30-day SEC yield and a 0.85% expense ratio.
Fidelity New Markets Income Fund (FNMIX)
“Understanding the fund’s true purpose and guideline constraints are often overlooked in the diligence process,” Kalapos says. “More strict guidelines can be both positive or negative, depending on the type of exposure you are trying to seek for — one potential effect is that it may negatively limit the portfolio management’s investment options.” This is particularly true for passive bond funds tracking an index.
For example, the passively managed Fidelity U.S. Bond Index Fund (FXNAX) must closely track its benchmark, the Bloomberg U.S. Aggregate Bond Index. In contrast, actively managed FNMIX is able to strategically seek exposures in bonds issued by emerging market countries such as Mexico, Venezuela and Brazil. The result is higher credit risk, but a greater 6.5% 30-day SEC yield at a 0.79% expense ratio.
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 after the 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 with high income potential is FSAHX.
This actively managed bond fund currently has a duration of just 2.1 years. All else being equal, another 100-basis-point rate hike would cause this fund to lose just 2.1% in net asset value. Despite the low duration, FSAHX still manages to deliver a high 7% 30-day SEC yield by focusing on non-investment-grade corporate bonds mostly rated BB or B. The fund charges a 0.7% expense ratio.
[READ: How to Invest When Interest Rates Are Cut]
Fidelity Low Duration Bond Factor ETF (FLDR)
FSAHX pays a high yield and has low interest rate risk, but its portfolio of high-yield bonds may be too risky for some investors. In addition, the fund is fairly expensive with a 0.7% expense ratio. For a much cheaper and safer alternative, consider FLDR, which also targets low-duration bonds but with an emphasis on higher credit quality. In addition, the ETF is much cheaper at a 0.15% expense ratio.
This ETF is passively managed, tracking the proprietary Fidelity Low Duration Investment Grade Factor Index. By doing so, it delivers low interest rate sensitivity while also keeping 81% of its holdings rated investment-grade, with 18.7% rated AAA. The trade-off is a lower 30-day SEC yield of 5.6%, but this may be an acceptable compromise for lower-risk investors favoring safety.
Fidelity Floating Rate High Income Fund (FFRHX)
Another way to hedge against interest rate risk in lieu of reducing duration is to focus on floating-rate bonds. As their name suggests, these bonds pay a variable interest rate that “floats” based on a benchmark like the Secured Overnight Financing Rate plus a spread. Thus, when rates rise and remain high, these bonds stand to benefit more compared to their fixed-rate counterparts.
Fidelity’s high-yield, income-oriented bond fund in this niche is FFRHX. The fund’s current portfolio consists mostly of term and revolving loans issued by companies with mainly non-investment-grade ratings of BB and B. The result is a very low duration of just 0.2 years, but a high 8.7% 30-day SEC yield. As with the previous actively managed bond funds, FFRHX charges a high 0.72% expense ratio.
Fidelity Sustainable High Yield ETF (FSYD)
Duration and credit quality aren’t the only factors bond investors have to weigh when picking a fund. Non-financial considerations such as environmental, sustainability and governance (ESG) factors may be just as important to some. To put this into play, consider an ESG high-yield bond ETF like FYSD, which currently pays a 7.2% 30-day SEC yield while charging a 0.55% expense ratio.
This bond ETF focuses on non-investment-grade bonds from issuers Fidelity believes to have proven or improving sustainability. Currently, this results in a high 83.5% allocation to bonds from U.S. companies such as Uber Technologies Inc. (UBER), Tenet Healthcare Corp. (THC) and Sunoco LP (SUN). In terms of interest rate sensitivity, the ETF is evenly distributed between short and intermediate maturities.
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7 of the Best Fidelity Bond Funds to Buy for Steady Income originally appeared on usnews.com
Update 04/04/24: This story was previously published at an earlier date and has been updated with new information.
