Fidelity Limited: Bond Bet for Safe Returns

12/08/2015 9:00 am EST

Focus: ETFs

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Fidelity offers its own slate of fixed-income ETFs; here, we look closely at its most appealing offering, asserts Mark Salzinger, editor of The Investor's ETF Report.

Robert Galusza is the lead manager of Fidelity Limited-Term Bond (FLTB) and its cousin, the Fidelity Limited Term Bond (FJRLX) mutual fund.

FJRLX has an outstanding track record of strong risk-adjusted returns. FLTB has generated strong returns since its inception a little more than a year ago.

Over the past year, FLTB has gained 1.8%, which nearly matches the performance of the Barclays US Aggregate Bond Index (2.0%), even though the index’s sensitivity to changes in interest rates has been almost twice as high as that of FLTB.

The ETF has easily outpaced the 1.1% return of its peers’ average. Galusza aims to wring a high level of income from a portfolio of shorter-duration securities, at least 80% of which must be rated investment-grade.

Recently, Galusza has emphasized credit quality, with less than 2% of the portfolio below investment-grade and only about 26% in bonds rated BBB, the lowest investment-grade tier. The rest of the portfolio is rated A or higher.

Galusza has been adding to higher quality consumer-related issues, including asset-backed securities constituting credit card and auto loan debt.

He believes these are good bets now because of low unemployment, low interest rates, and improved balance sheets among consumers.

The portfolios of FLTB and its mutual fund cousin have consistently emphasized corporate bonds, which recently accounted for about 59% of FLTB.

Galusza favors financials over industrials, which the manager says stems from their relatively stronger finances, partly thanks to heightened regulatory scrutiny.

FLTB’s interest rate sensitivity is guided by a proprietary benchmark of shorter-term US bonds with an overall duration between two and five years. Recently, the duration of FLTB was 2.8 years vs. 5.2 years for the Barclays US Aggregate Bond Index (an intermediate-term benchmark).

FLTB recently yielded 1.3% vs. 0.5% for iShares 1-3 Year Treasury (SHY). That’s an attractive advantage for FLTB, especially considering the limited interest rate risk and high credit quality of its portfolio.

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