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Fidelity Debuts Three Actively Managed Bond ETFs

Sweta Killa

Actively managed ETFs are gaining immense popularity in recent years and generally perform well in a world torn by strife and uncertainties. More than three-fourth of the total actively managed funds goes to the fixed income world (read: Two Actively Managed ETFs worth the Cost).

Given the success of these products, Fidelity, the Massachusetts-based second largest mutual fund issuer, rolled out three active bond ETFs – Fidelity Total Bond ETF (FBND), Fidelity Corporate Bond ETF (FCOR) and Fidelity Limited Term Bond ETF (FLTB).

The three products seek to provide a high level of current income and complement three of Fidelity’s most popular active fixed-income mutual funds. These essentially cover the entire spectrum of the investment-grade market. The new ETFs charge 45 bps in annual fees and will be overseen by portfolio managers from Fidelity's mutual fund fixed-income team.

New ETFs in Focus

FBND looks to offer higher returns by investing at least 80% of its assets in high-yield investment-grade bonds as well as emerging markets bonds while FCOR targets the investment-grade corporate bonds corner of the global fixed income market with various maturities. Meanwhile, FLTB seeks to provide exposure to the short end of the yield curve with weighted average maturity of two to five years (see: all investment grade corporate bond ETFs here).

Though the funds do not replicate the performance of a specified index, fund managers use certain benchmark as a guide when allocating different bond asset classes, maturities and sectors. As such, the three ETFs are benchmarked against the Barclays U.S. Universal Bond Index, the Barclays U.S. Credit Bond Index, and the Fidelity Limited Term Composite Index, respectively.

How Does They Fit in a Portfolio?

These ETFs could be intriguing choices for investors seeking to preserve capital and generate consistent income in an uncertain rate environment. As these products are actively managed, have the potential to outperform the traditional index and provide risk-adjusted returns.

In particular, FLTB seems to be a great investment given that investors are flocking to low duration bond ETFs in anticipation of the interest rate hike sometime in the middle of next year. This is especially true as the low duration bonds are relatively less volatile and less impacted than medium and long-dated bonds when rates eventually rise (read: Prepare for Rising Rates with Floating Rate Bond ETFs).

Further, high quality bonds provide a big increase in yields when compared to Treasury bonds, with a slight increase in risk. Due to solid balance sheets and high cash levels of the investment grade corporates, the chances of default are minimal. Thus, the investment-grade bonds can be considered safe as far as credit risk is considered.

Moreover, if the global economic situation worsens causing further ‘flight to quality’, the investment grade bonds will suffer less.

Competitors

The new funds will face stiff competition from PIMCO products that lead the fixed income market in an actively managed space. The ultra-popular PIMCO Total Return ETF (BOND) with AUM of $2.8 billion is the direct opponent to Fidelity Total Bond ETF. The fund has effective duration of 4.87 years and average maturity of 8.33 years while charges 55 bps in fees per year.

PIMCO Low Duration ETF (LDUR) focuses on short-term bond market with effective duration of 1.75 years and effective maturity of 1.75 years. The ETF has amassed $140 million in its asset base and has expense ratio of 0.49%. Apart from PIMCO product, iShares Short Maturity Bond ETF (NEAR) also poses threat to FLTB (read: Inside the 2 New Active Bond ETFs from PIMCO).

Coming to FCOR, this product does not have a contender in the actively managed fund space. Looking to passively managed fund, iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) could be a potential rival. The fund has an average maturity of 11.73 years and an effective duration of 7.79 years. It has AUM of $17.7 billion and expense ratio of 0.15%.

Given this, it seems that the new Fidelity products will perform favorably in terms of investor interest. And if it can manage to generate a decent yield and stable returns, it won’t be too hard to see big inflows from these solid additions to the active bond lineup.

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