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Fidelity Total Bond ETF Benefits From Shrewd Allocation Calls

Bond with this fund.

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Deep experience, solid resources, and thoughtful execution make Fidelity Total Bond ETF FBND one of the best core-plus offerings.

This strategy takes a flexible approach, but the team has managed it well. Besides investing in the typical investment-grade corporate credit, mortgages, and U.S. Treasuries that constitute the strategy’s Bloomberg US Aggregate Bond Index benchmark, co-lead managers Ford O’Neil and Celso Munoz and their comanagers may allocate up to 20% in non-investment-grade bonds, including high-yield and emerging-markets debt, when the team finds market valuations compelling. Relative to more conservatively positioned peers in the intermediate core-plus bond Morningstar Category, this provides the strategy with an edge in risk-on markets, but the flexibility can invite more volatility. The strategy’s duration usually sits within one third of a year of its index, which can act as a ballast when rates spike in years such as 2022.

O’Neil and Munoz, in collaboration with sector specialists from across Fidelity’s fixed-income cohort, have made shrewd allocation calls for the strategy. Exposed to a tad more credit than competitors during the depths of the pandemic panic in early 2020, the strategy fell behind, but the team used Fidelity’s wide resources and the portfolio’s buying power to add a substantial wash of new issues and investments in slumping names with strong fundamentals to beat nearly three fourths of peers that year. The strategy’s rebound continued in 2021 with a top-quartile showing thanks to its higher allocation to lower-rated debt. Keeping its duration near the index has helped the strategy weather relative rate volatility. As rates spiked over 2022, the strategy’s 12.8% loss, while painful, edged out its typical peer’s 13.5% loss given its moderately shorter duration and underweighting in mortgages. The strategy’s 3.4% return for the year to date through July 2023 handily beat the typical peer’s 2.7% gain thanks to higher exposure to high-yield bank loans and U.S. corporates, as well as solid security selection in names like Warner Bros Discovery WBD.

This strategy has excelled under O’Neil. From his December 2004 start through July 2023, the Z shares’ 3.7% annualized return beat the 3% gain of its index and the 3.4% median return of a group of distinct category peers, all while keeping the strategy’s volatility lower than that of its typical peer over that period.

The author or authors own shares in one or more securities mentioned in this article. Find out about Morningstar’s editorial policies.

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