Harry Domash is a leading income specialist; in his Dividend Detective, the advisor maintains a wide...
Fidelity Bond Funds for Low Risk Income
12/19/2017 5:00 am EST
We are slightly reducing our portfolios' sensitivities to rising short-term interest rates. Indeed, the Fed is likely to raise rates this month, and three times next year, notes fund expert John Bonnanzio, editor of Fidelity Monitro & Insight.
But should the economy pick up steam and force inflation a bit higher, the risk of even more hikes become greater. As a consequence, we’ve buying Fidelity Conservative Income Bond (FCONX), which is essentially a money market fund on steroids.
Conservative Income is an ultra-short (duration of less than two months) bond fund that, in many respects, resembles the money market funds of old, before new government regulations forced certain money market funds o focus only on government debt.
Corporate debt is now up to nearly 90% of assets as the management team sees a strong economy with little default risk. Financials (around 65%), with an emphasis on banks, are the dominant area.
The fund’s yield advantage over money markets (1.17% vs. 0.77%), has decreased somewhat from a year ago (about 40 basis points down from 63), but it remains an attractive alternative.
With more rate hikes likely in 2018, shorter-duration bonds could suffer — especially those focused on government debt. But with a strong economy and an ultra-short duration, this fund’s credit risk is low.
Fidelity Strategic Income (FSICX) could be grouped among Asset Allocation, Specialty or even Taxable Bond funds. But we label it a High Income fund because its yield objective is satisfied by its neutral allocation (about 45%) to high-yield (junk) bonds, and 15% to emerging market debt.
And, in recent years, floating-rate debt (now about 6%) was added at the expense of lower-yielding, U.S. government bonds (now 25%, down from 30%). These allocations provide a yield of 2.77%, a percentage point or so lower than its average high-yield peer.
The fund’s yield is tempered by significant holdings in U.S. and foreign investment-grade government bonds. While U.S. dollar exposure is 84%, there are also 8% euro and 3% yen exposures. (Top holdings include the sovereign debt of France, Japan and Germany.)
This mix creates a “barbelled” approach to risk management with U.S. and foreign government bonds offsetting its more credit-risky holdings.
Related Articles on DIVIDEND
Kelley Wright ranks among advisory industry's most respected experts on blue chip, dividend stocks. ...
For investors searching for higher yields, there is the challenge in analyzing whether dividends are...
Based in Broomfield, Colorado, and founded in 1997, Vail Resorts, Inc. (MTN) operates mountain resor...