Even if your portfolio is primarily tailored for steady income rather than growth, it’s still worth diversifying. Relying on just one income-generating asset class exposes you to unnecessary risk.
Take dividend-paying stocks, for example. If you concentrate your portfolio here, you could face dividend cuts during a recession, as companies prioritize preserving cash to survive tough conditions.
Similarly, relying solely on real estate investment trusts (REITs), which own and often operate income-producing properties, can also be risky. A real estate sector downturn, increased vacancy rates or rising mortgage defaults can lead to distribution cuts and falling property values.
To offset these risks, consider adding some fixed-income investments to your portfolio. When you invest in bonds, you’re essentially making a loan to governments or corporations. In return, you earn regular interest payments, called coupons, and get your principal back when the bond matures.
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That said, managing a portfolio of individual bonds can be complex. As a lender, you’d need to research each issuer’s creditworthiness, determine the right maturity dates to match your goals and diversify to reduce risks. For many investors, this can be overwhelming.
“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.”
A simpler approach is to invest in a bond fund. These funds pool together bonds from various issuers, offering you instant diversification. They also pay out distributions on a monthly basis, drawing from the interest income generated by the bonds they hold.
At Fidelity, there are 45 taxable bond funds, including mutual funds and exchange-traded funds (ETFs). For income-focused investors, one practical way to narrow down your options is by looking for funds with a trailing-12-month yield of 4% or higher.
Here are seven of the best Fidelity bond funds to buy for steady income:
| Fund | Expense Ratio | Trailing-12-month yield |
| Fidelity Total Bond ETF (ticker: FBND) | 0.36% | 4.5% |
| Fidelity Corporate Bond ETF (FCOR) | 0.36% | 4.2% |
| Fidelity Preferred Securities and Income ETF (FPFD) | 0.35% | 4.6% |
| Fidelity Conservative Income Bond Fund (FCNVX) | 0.25% | 5.1% |
| Fidelity Mortgage Securities Fund (FMSFX) | 0.44% | 3.9% |
| Fidelity Floating Rate High Income Fund (FFRHX) | 0.75% | 8.3% |
| Fidelity New Markets Income Fund (FNMIX) | 0.79% | 4.8% |
Fidelity Total Bond ETF (FBND)
“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. This is why junk bonds pay higher yields than investment-grade corporate bonds and Treasurys.
Investors can strike a balance between high-yield and investment-grade bonds via FBND. This ETF is designed to provide comprehensive exposure to the domestic bond market. The bulk of FBND tracks Treasurys and corporate bonds. However, it currently allocates 8.5% to high-yield bonds to enhance yield. Currently, investors can expect a 4.5% trailing 12-month yield against a 0.36% expense ratio.
Fidelity Corporate Bond ETF (FCOR)
If you don’t mind slightly higher credit risk, consider focusing on corporate bonds. The Fidelity ETF to use for this role is FCOR. Unlike FBND, FCOR only holds a 10.6% allocation to Treasurys. The remainder of the ETF is held in a balanced blend of short, intermediate and long-term corporate bonds. The ETF has an investment-grade mandate, meaning that the corporate bonds have a minimum “BBB” credit rating.
Despite having 479 holdings, FCOR is narrower in scope compared to FBND. Unlike FBND, this ETF does not track the broad investable bond market, and thus underweights Treasurys and high-yield bonds. In addition, it’s not the most tax-efficient due to the focus on corporate bonds. However, it produces similar income potential, at a 4.2% trailing 12-month yield. FCOR charges a 0.36% expense ratio.
Fidelity Preferred Securities and Income ETF (FPFD)
Another way income investors can diversify beyond the usual Treasurys, corporate bonds and mortgage-backed securities is via an allocation to hybrid securities. These assets sit between traditional fixed-income and equity investments to offer traits from both sides. Notable types include convertible bonds and preferred shares, which can offer greater upside potential compared to regular bonds while paying decent income.
For exposure to these assets, Fidelity offers FPFD. This actively managed ETF currently holds a portfolio of 233 convertible bonds and preferred shares around the world, with a 26% allocation to North American issuers. Fidelity notes that this ETF has a long maturity profile, making it more sensitive to interest rate changes. FPFD charges a 0.35% expense ratio and pays a 4.6% 12-month distribution yield.
Fidelity Conservative Income Bond Fund (FCNVX)
“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 consideration can be seen in play with FCNVX.
FCNVX’s actively managed strategy imposes certain limitations. Namely, the fund must invest at least 80% of its assets in U.S. bonds that are investment-grade with a maturity of four years or less. On average, the fund maintains a weighted average maturity of one year or less. This fund is tailored for conservative income generation, with a 5.1% 12-month yield and minimal price volatility.
Fidelity Mortgage Securities Fund (FMSFX)
Bonds aren’t only issued by corporations or the Treasury department. Some agencies, such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corp. and the Government National Mortgage Association, can also issue bonds. These are known as mortgage-backed securities (MBS). For exposure to these bonds, Fidelity offers FMSFX at a 0.44% expense ratio.
This ETF reserves 80% of its portfolio for investment-grade, pass-through MBS and repurchase agreements but can allocate the remainder to bonds with lower credit ratings. In addition, the fund is capable of employing leverage, which can enhance yields but increase risk. Right now, FMSFX has 124.3% notional exposure, for approximately 1.24X leverage. The fund has a 3.9% 12-month yield.
Fidelity Floating Rate High Income Fund (FFRHX)
Most bonds have an inverse relationship with interest rates. When rates rise, bond yields increase, which makes bond prices fall. As such, many fixed-income funds face significant headwinds during interest rate hikes. This issue is particularly acute for funds holding longer maturity bonds. However, one type of bond actually benefits from interest rate hikes. These are called floating-rate bonds.
Unlike regular bonds, the coupons of floating-rate bonds are pegged to a benchmark such as the secured overnight financing rate plus a spread. To access them, investors can buy FFRHX. This ETF primarily consists of term and revolving loans. On average, most of FFRHX’s portfolio is rated non-investment grade at “BB” and “B” in credit rating. The fund has an 8.3% 12-month yield.
Fidelity New Markets Income Fund (FNMIX)
On average, U.S.-domiciled public corporations tend to have good governance, ample access to capital and low political risk. This makes them an attractive option for fixed-income investors, but yields aren’t the highest. With an emerging bond market fund like FNMIX, fixed-income investors can diversify globally by adding exposure to up-and-coming countries. This can provide higher yield but come with greater risk.
FNMIX largely holds sovereign bonds issued by foreign emerging market governments. Countries represented in this fund include Mexico, Saudi Arabia, Brazil, the United Arab Emirates, Turkey and Colombia. A significant portion of this fund is rated non-investment grade due to currency, political and economic risks. However, investors get paid a solid 4.8% 12-month yield.
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7 of the Best Fidelity Bond Funds to Buy for Steady Income originally appeared on usnews.com
Update 12/27/24: This story was previously published at an earlier date and has been updated with new information.
