Bond funds are a cornerstone for many income investors, and many asset managers offer comprehensive fund screeners to help investors sift through their lineup. Fidelity is no exception.
If you are specifically looking for a bond fund that pays steady income, there are a few key criteria to consider that will help narrow down the list of Fidelity’s 323 mutual funds.
The first step is to isolate the asset class by selecting either “taxable bond” or “municipal bond.” Depending on your income bracket and the type of account you plan to invest in, one may be more suitable than the other.
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For instance, municipal bonds can offer tax advantages for high-income earners in taxable accounts, whereas taxable bonds might be more appropriate for tax-sheltered retirement accounts like a Roth IRA.
Another crucial metric to focus on is the 30-day SEC yield, which provides a standardized measure of the fund’s income-generating potential. It’s an essential tool for assessing whether the income from a bond fund meets your needs.
By applying these filters, Fidelity’s lineup of mutual funds can be pared down to 14 bond funds that offer a steady income with a 30-day SEC yield above 5%.
However, remember that the income is not a free lunch. To achieve yields higher than the current risk-free federal funds rate of 5.25% to 5.5%, you’re taking on credit risk.
This is the probability of the bond issuer not paying you a coupon on time or defaulting altogether and not paying back the principal. You’re being compensated for this risk with higher yields, so remember, it’s not free money.
Here are seven of the best income-oriented Fidelity bond funds to buy in 2024:
| Fund | Expense ratio | 30-day SEC yield |
| Fidelity Capital & Income Fund (ticker: FAGIX) | 0.97% | 5.6% |
| Fidelity Strategic Income Fund (FADMX) | 0.66% | 5.2% |
| Fidelity High Income Fund (SPHIX) | 0.88% | 7.3% |
| Fidelity Short Duration High Income Fund (FSAHX) | 0.71% | 6.8% |
| Fidelity Floating Rate High Income Fund (FFRHX) | 0.75% | 8.4% |
| Fidelity Corporate Bond Fund (FCBFX) | 0.45% | 5.1% |
| Fidelity New Markets Income Fund (FNMIX) | 0.79% | 6.8% |
Fidelity Capital & Income Fund (FAGIX)
“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.” This is especially critical for actively managed bond funds.
Before you fork out a higher expense ratio for an actively managed bond fund, check to see if it has historically outperformed its benchmark. A good example is FAGIX, a hybrid fund that blends roughly 20% equities and 80% high-yield corporate bonds to deliver a 5.6% 30-day SEC yield. Over the past 10 years, FAGIX has outperformed the ICE BofA U.S. High Yield/U.S. High Yield Constrained Blend Index.
Fidelity Strategic Income Fund (FADMX)
“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.” For income, an unconstrained active bond strategy may be better.
FADMX is an example of a bond fund with a wide mandate. This fund is able to allocate between high-yield corporate bonds, U.S. government bonds, investment-grade bonds and foreign bonds, including those from emerging markets. In addition, FADMX is able to hedge its foreign currency exposure and invest in derivatives to leverage its portfolio. The fund pays a 5.2% 30-day SEC yield.
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, partner at Regency Wealth Management. However, by pooling high-yield bonds in a fund, investors can greatly reduce the risk of defaults thanks to diversification.
The majority of holdings in SPHIX are high-yield bonds with ratings of BB and B, below the minimum BBB rating to be considered investment grade. However, this risk is compensated with a much higher 30-day SEC yield of 7.3%. Investors should be conscious of poor tax efficiency, with a 43% turnover rate, and a high 0.88% 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.” For minimizing interest rate risk, FSAHX is ideal.
The holdings in FSAHX range from under six months in maturity to just over five years, resulting in a low average duration of two years. All else being equal, a 100-basis-point rate hike would cause FSAHX to lose around 2% in net asset value. Despite the low duration, the fund is able to achieve a competitive 6.8% 30-day SEC yield by focusing on non-investment-grade bonds, most of which are rated BB and B.
[8 Top-Performing Fidelity Funds for Retirement]
Fidelity Floating Rate High Income Fund (FFRHX)
If you want to benefit from a “higher-for-longer” interest rate environment as opposed to merely hedging against it, consider a floating-rate bond fund. These funds hold special bonds that pay a variable interest rate that changes based on a benchmark plus a spread. Previously, this was the London Interbank Offer Rate (LIBOR) but has since transitioned to the Secured Overnight Financing Rate (SOFR).
Fidelity’s high-income offering here is FFRHX. This fund primarily holds term and revolving loans, which are a type of non-investment-grade fixed income. The duration of this fund is almost non-existent at just 0.2 year, but it currently pays a high 8.4% 30-day SEC yield. As with the previous funds, the majority of FFRHX’s holdings are rated BB and B. FFRHX charges a 0.75% expense ratio.
Fidelity Corporate Bond Fund (FCBFX)
If you want to lower credit risk, then focusing on investment-grade corporate bonds may be a better idea. As noted earlier, these are securities rated BBB or higher. To access these bonds, consider FCBFX, which has roughly 60% of its portfolio rated BBB and 23% rated A. Fidelity rates this bond fund as “lower” on their risk rating scale. However, it still pays a decent 5.1% 30-day SEC yield.
FCBFX’s portfolio largely consists of investment-grade corporate bonds from the industrial and banking sectors. On average, the bonds in FCBFX’s portfolio have a maturity of around 11.4 years, resulting in an average duration of 6.9 years. Because the investment-grade segment of the market is more liquid and transparent, FCBFX is also able to keep its expense ratio lower, at 0.45%.
Fidelity New Markets Income Fund (FNMIX)
U.S. government-issued debt generally carries high credit ratings, as do the bonds of other developed nations like Canada, the U.K. and Switzerland. However, the trade-off is lower yields, as the credit risk is significantly lessened. But instead of focusing on corporate-issued bonds for higher income, investors can also target government-issued debt by emerging market countries with lower credit ratings.
FNMIX achieves this objective by holding mostly sovereign bonds, but also agency and corporate bonds from countries like Mexico, Saudi Arabia, Brazil, Venezuela the United Arab Emirates and Turkey. Some of these bonds are rated investment-grade, but a majority are rated BBB, B and CCC. To compensate for this credit risk, the fund pays a higher 6.7% 30-day SEC yield.
[READ: 7 Best Vanguard Bond Funds to Buy]
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7 of the Best Fidelity Bond Funds to Buy for Steady Income originally appeared on usnews.com
Update 07/17/24: This story was previously published at an earlier date and has been updated with new information.
