John Gabriel: The strategy behind Gold-rated Fidelity Total Bond Fund (FTBFX) recently became available as an exchange-traded fund. The ETF, which trades under the ticker FBND, is not a separate share class of the mutual fund. It is, however, managed by the same team of portfolio managers and employs the same strategy. It also charges the same 45-basis-point fee as the mutual fund's no-load share class.
Lead manager Ford O'Neil has a strong long-term record running the mutual fund. So, even though the ETF has less than one year of live performance, investors can still glean some insights about its prospective behavior.
The mutual fund has been around since 2002 and has over $20 billion in assets. The ETF, on the other hand, was launched late last year and has around $100 million in assets. This size difference makes it impractical for the ETF to mirror the mutual fund portfolio, holding by holding. The mutual fund has nearly 1,500 holdings, whereas the ETF is still building out its portfolio and currently contains about 300 bonds. The goal is to have the portfolios converge over time as assets in the ETF build.
In the meantime, there may be periods where the performance between the two is not identical. But tracking error should be fairly minimal since the portfolio managers carefully match the portfolios on key metrics such as credit quality, portfolio duration, and yield-curve positioning. Since its inception in October 2014, the ETF's tracking error against the mutual fund has been just 7 basis points.
So, the decision of whether to go with the mutual fund or the ETF really boils down to mechanics. Those who value intraday liquidity and daily portfolio disclosure may find the ETF structure more appealing. The mutual fund structure, on the other hand, may be more suitable for investors seeking to automatically reinvest dividends, or for those looking to avoid potential trading commissions when dollar-cost averaging into the fund with smaller, more frequent investments.