Investors don’t have to look too far for income these days, but the Fidelity Total Bond ETF (FBND) stands out as among the top in its class, according to Morningstar. The actively managed fund, which trades under ticker FBND, has a 30-day SEC yield of 5.41%, according to Morningstar. The ETF also carries an expense ratio of 0.36%. It’s considered a core-plus offering, which means managers can add high-yield and other alternatives in addition to its core options of diversified, high-quality bonds. FBND allocates up to 20% in non-investment grade bonds, but they currently make up just over 12% of the fund. “Deep experience, solid resources, and thoughtful execution make Fidelity Total Bond one of the best core-plus offerings,” Morningstar senior analyst Mike Mulach wrote on Aug. 16. FBND’s total return year to date is -0.83%, as of Monday, according to Morningstar , which gives the fund four-stars. It has a trailing 5-year total return of 0.87%. Its trailing 3-year return is -4.24% and trailing 1-year return is 1.47%, both in the top quartile. It invests mostly in corporate and government bonds, as well as securitized debt. About 41% of its holdings are intermediate term, roughly 36% are long term and 23% are short term, as of Aug. 31, according to the fund’s website. Its mix of assets means it could be more volatile than the Bloomberg US Aggregate Bond Index. However, the volatility of its returns, based on standard deviation, is really close to that of the benchmark, portfolio manager Celso Muñoz said. “If you look at the track record, we’ve delivered, over most time periods — whether you look at the 1-year, 3-year, 5-year, 10-year — around 100 basis points or more above performance versus the benchmark,” said Muñoz, who also serves as the co-lead manager for the Fidelity and Fidelity Advisor Total Bond Funds. “We’re delivering what I would call core-plus returns with core-like volatility. So on a risk adjusted basis, it’s really, really strong,” he added. ‘Gradual contrarians’ The management team for the ETF is led by Muñoz and Ford O’Neil, and includes four additional co-managers. The team takes a consistent approach to investing, instead of trying to “swing for the fences every single year,” which can result in outperformance one year and a dismal year the next, he said. The managers sit together on an open trading floor and discuss all the ideas that come up, such as sector allocation, views on the macro environment or specific bonds. They are also what Muñoz calls “gradual contrarians.” “So as the market starts to get richer, you’ll start to see us reduce the amount of risk in our portfolios. As the market gets more attractive, you’ll see it start increasing the amount of exposure,” he explained. They make that assessment through research, including meetings with corporate executives, public agencies and government issuers from all over the world. For instance, the firm has a large equity presence and when the equity analysts meet with companies, the fixed-income analysts are also a part of the discussions. “There’s a very high degree of collaboration that happens across equity, fixed income, high yield, leveraged loans,” Muñoz said. “We end up getting this really holistic view of the capital structure of all of the entities that we look at, which ultimately adds a lot of value.” FBND’s top 10 holdings are all in various Treasury notes and bonds, as of Aug. 31. About 2.4% of its net assets are in Federal National Mortgage Association securities and 1% in Government National Mortgage Association securities. Bank of America is the top corporate debt holding. Shifting allocations Given the economic backdrop and the team’s due diligence on its assets, Muñoz feels very comfortable having a nice-sized position in high-yield and leveraged loans. However, the team recently cut its high-yield exposure to 12.4% from 15%, he explained. “In other words, they’ve become richer and as gradual contrarians, as sectors become richer, you will see us cutting back a little bit and reducing our exposure,” he said. “So on an overall basis today, [the team feels] like we have a lot of dry powder in the portfolio. If there is a bit of volatility at some point, we’ll be in a position where we can add … to risk.” The fund has also made some shifts in duration. When rates started to go up, the team bought the long end of the Treasury yield curve. Now, they are positioning for the end of Federal Reserve ‘s rate hikes and eventual rate cuts. “At some point, there’s going to be a big re-steepening of the yield curve. I don’t know when that happens, but I’d like to get positioned for it,” Muñoz said. “So we’ve shifted some of that long Treasury exposure more into the intermediate part of the Treasury yield curve, which I think is going to be the sweet spot when there is a re-steepening of the yield curve.” In the meantime, while they wait, the portfolio is still generating strong income, he added. The fund also has positions in collateralized loan obligations and agency-backed mortgages, which have added a lot of value to the fund over the past year, Muñoz said. The team began buying agency-backed mortgages again last fall after being underweight. Earlier this year, they scooped up some bargains after the bonds came back into the market during the regional bank crisis. “We were able to scour through those lists, and buy from those initial sales of the most attractive mortgages that were coming to market,” he said. “We were able to add a lot of value by buying those mortgages at really cheap levels.”
