A bond might sound like fancy financial engineering, but the key concept is quite simple: When you buy one, you’re effectively becoming a lender to the issuer of the bond.
For example, if you buy a Treasury bond from the U.S. government, it now owes you money. Similarly, if you purchase a corporate bond from a company like Coca-Cola Co. (ticker: KO), you effectively become one of its creditors.
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In exchange for your initial loan, the issuer of the bond promises to pay you semi-annual payments, known as coupons, plus the principal amount, back at maturity.
The rate, or yield, of this coupon depends on several variables — primarily the prevailing interest rate environment, the riskiness of the issuer and the maturity of the bond.
Generally, bonds will pay more income when interest rates are high, the issuer has a lower credit rating (higher risk) or the bond has a longer maturity, all else being equal.
However, you might notice an issue with individual bond investing for income: the semi-annual payments aren’t ideal if you need steady cash flows coming in.
Fortunately, pooling bonds into a fund, and then carving out shares of that fund to invest in, solves the issue. In addition to more frequent monthly distributions, you also get professional portfolio management, greater diversification and stronger liquidity.
“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.”
Here are seven of the best Fidelity bond mutual funds and exchange-traded funds (ETFs) to buy for steady income:
| Bond Fund | Expense Ratio | 30-day SEC Yield |
| Fidelity Capital & Income Fund (FAGIX) | 0.97% | 5.6% |
| Fidelity Focused High Income Fund (FHIFX) | 0.75% | 5.7% |
| Fidelity Short Duration High Income Fund (FSAHX) | 0.71% | 6.8% |
| Fidelity Investment Grade Bond Fund (FBNDX) | 0.45% | 4.4% |
| Fidelity Total Bond ETF (FBND) | 0.36% | 4.9% |
| Fidelity Preferred Securities and Income ETF (FPFD) | 0.59% | 4.9% |
| Fidelity Investment Grade Securitized ETF (FSEC) | 0.36% | 4.3% |
Fidelity Capital & Income Fund (FAGIX)
“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 maximum discretion, consider an active bond fund like FAGIX.
This fund has an “unconstrained” approach — it has leeway to invest in higher-risk fixed-income securities, including defaulted bonds, junk bonds and even some equities. Historically, this approach has helped FAGIX outperform its benchmark, the ICE BofA US High Yield/US High Yield Constrained Blend index. FAGIX pays a 5.6% 30-day SEC yield and charges a 0.97% expense ratio.
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, partner at Regency Wealth Management. While some corporate-issued bonds are investment grade, the highest-yielding ones are not.
To capture non-investment-grade bonds, Fidelity offers FHIFX. This fund generally targets bonds rated “BB” and “B,” but is also able to invest in preferred shares, defaulted bonds and convertible bonds. FHIFX currently pays a 5.7% 30-day SEC yield and charges a 0.75% expense ratio. The fund also has no minimum investment requirements or transaction fees on Fidelity’s brokerage platform.
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.” The high-yield option in this segment is FSAHX.
FSAHX primarily targets bonds rated “BB” and “B” with three years or less remaining in maturity. By doing so, the fund is able to achieve a duration of just two years, making it fairly resilient to interest rate fluctuations. With short-term rates elevated for the time being, FSAHX is also paying a competitive 6.8% 30-day SEC yield. The fund charges a 0.71% expense ratio and also has no minimum required investment.
[READ: 9 Best ETFs to Buy for a Recession.]
Fidelity Investment Grade Bond Fund (FBNDX)
Not all investors may be willing to tolerate the higher risk of junk bond funds. For a more balanced approach, investors can buy funds that hold bonds rated “BBB,” which is the minimum credit rating to qualify as investment-grade. To easily capture a diversified pool of these bonds, you can buy FBNDX at a 0.45% expense ratio. Currently, this fund is paying a 4.4% 30-day SEC yield.
FBNDX has historically been a top performer in its peer category, beating out the majority of 418 funds in terms of risk-adjusted returns to earn a five-star Morningstar rating. The fund features an eclectic mix of government, agency and corporate issues ranging from “AAA” to “BB” in credit rating. Over the last 10 years, FBNDX has managed to outperform its benchmark, the Bloomberg U.S. Aggregate Bond Index.
Fidelity Total Bond ETF (FBND)
With interest rates today sitting higher than they have been in many years, even plain-vanilla aggregate bond funds are paying decent yields. If you prefer a “buy the haystack” approach to bond investing, consider a total bond market fund like FBND. For a 0.36% expense ratio, FBND provides exposure to more than 3,800 bonds, most of them “AAA” and investment-grade but with a small allocation to junk bonds.
An ETF like FBND is designed to be a core fixed-income holding. That is, this fund does not attempt to target particular fixed-income sectors, maturities or credit qualities. These types of funds are best suited for beginner fixed-income investors prioritizing maximum diversification, striking a balance between safety and income. Right now, FBND is paying a 4.9% 30-day SEC yield.
Fidelity Preferred Securities and Income ETF (FPFD)
Investors comfortable with a hybrid approach to bond investing can use an ETF like FPFD to access more exotic securities like preferred shares and convertible bonds. These assets share traits found in both stocks and bonds, and generally have higher-yielding characteristics compared to the former, while retaining the stability of the latter. As such, they can be a balanced option for income needs.
That being said, hybrid securities tend to be more opaque and less liquid. Thus, delegating the selection and portfolio management to an ETF like FPFD can be a sound strategy for accessing them. For a 0.59% expense ratio, investors in FPFD can currently earn a 4.9% 30-day SEC yield while benefiting from monthly distributions. However, this ETF has higher interest rate sensitivity owing to its longer maturity.
Fidelity Investment Grade Securitized ETF (FSEC)
There’s another special type of bond created by pooling together various types of debt, typically mortgages, but also auto loans or credit card receivables, and packaging them into a single security that can be sold to investors. These are called “asset-backed securities” and can be accessed by retail investors via funds like FSEC for a 0.36% expense ratio. Currently, FSEC is paying a 4.3% 30-day SEC yield.
The income distributed by this fund is largely derived from mortgage-backed securities issued by agencies like the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Overall, the portfolio of this ETF is rated “AAA” thanks to the guaranteed status of its underlying securities, making it a higher-quality pick.
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7 of the Best Fidelity Bond Funds to Buy for Steady Income originally appeared on usnews.com
Update 08/26/24: This story was previously published at an earlier date and has been updated with new information.
