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Fidelity Total Bond ETF (NYSEARCA:FBND) invests in a wide variety of bonds, including high yield, investment grade and emerging markets bonds. It invests up to 20% of its assets in lower quality bonds, in order to capture yield and also to fulfill the objective of being a “total” bond fund. It also invests across a range of maturities. This bond ETF offers investors a generous yield and the opportunity to hold an investment that gives them exposure to the wide range of options in the bond market. Let’s take a closer look:
Portfolio Features to Consider
This fund was launched on October 6, 2014 and has more than 3,600 securities in its portfolio, with approximately $8 billion in assets. It is actively managed and has an expense ratio of 0.36%. The weighted average maturity is 8.5 years and it has a current SEC yield of 5.13%. This yield competes with current rates offered by money market funds, but the difference is that money market fund rates could be about to plunge over the next couple of years, meaning this ETF could be prepared to reward investors with a return greater than 5%. but also potentially with capital gains. This fund is rated 4 stars by Morningstar for its performance over 3 years and 5 years. As shown below, the vast majority of this fund is invested in investment grade bonds, and the reason there is a negative cash balance is because the fund uses low leverage which can magnify gains or losses. losses.
Investment grade bonds: 89.16%
High yield bonds: 11.6%
Emerging markets: 2.8%
Cash and equivalents: -3.56%
Table
As shown in the chart below, this ETF dropped to the all-time low of $40 in October 2023. In early 2024, it surpassed the $45 level, but there has been a slight pullback recently . The 50-day moving average is $44.62 and the 200-day moving average is $43.81. It is also worth noting that at the very end of 2023, a bullish “Golden Cross” formation appeared on the chart when the 50-day moving average crossed above the 200-day moving average.
Stockcharts.com
Signs of weakness in the US economy suggest rate cuts are coming
Recent reports show that the American economy is starting to weaken. For example, in the first quarter of 2024, gross domestic product or “GDP” grew at a rate of only 1.6%. This is a significant decline (50%) compared to the 3.4% GDP growth rate recorded in the same quarter last year. It appears that some consumers are cutting back on what is even an affordable luxury for many people, namely coffee and other drinks at Starbucks (SBUX) which reported a decline in revenue for second-quarter 2024 results. Starbucks said some consumers were becoming more cautious.
Fears of a potential slowdown in the US economy were reinforced by the April Unemployment Report which shows that fewer jobs were created compared to expectations and unemployment increased. This shows a potential change in dynamics in the jobs market and future reports could show accelerated weakness. While many investors seem to believe in a soft landing, I think the Federal Reserve is still looking in the rearview mirror rather than the future. Not long ago, the Federal Reserve called inflation “transient” because it kept rates low longer. Now, they’ve been talking about the rise for longer, and in doing so, they’re looking at data that isn’t necessarily indicative of what lies ahead in terms of the future.
Even if the Federal Reserve keeps rates higher for a few more months, it seems to just be delaying the inevitable, as either the data will soon start to deteriorate, forcing a rate cut, or the Federal Reserve will decide to relax its rates. soon in order to reduce the risk of a brutal recession.
Earlier this year, the Federal Reserve released projections which indicate that a 2.25 point cut in the federal funds rate could occur by the end of 2026. This could reduce the target federal funds rate from the current range of 5.25% to 5.5%. , at a range of 3% to 3.25%, over the next two years. This would represent a 40% drop in interest rates by 2026. This type of drop could trigger a significant rally in bonds and create capital gains for investors in this ETF. This is why I think it is important to start moving liquidity from money market funds to the bond market. A recent CNBC article highlights that BlackRock analysts (BLACK), believe it is time for investors to buy bonds, particularly because they are underweight in bonds, the the article states:
“In fact, many investors are currently significantly underweight fixed income. They have just a 19% average allocation to the asset class, according to the BlackRock report, which analyzed Morningstar data on exchange-traded funds and U.S. money and bond market mutual funds. active as of January 31.
“This is a very attractive opportunity for investors to right-size the bond portion of their portfolio,” Laipply said.
Potential Downside Risks
There is increased default risk in certain sectors of the bond market, including high yield and emerging market bonds. However, default rates remain very low, at least for the moment.
There is also duration and interest rate risk, particularly for longer duration bonds, which could present downside risks if interest rates were to continue to rise. One thing that helps mitigate the downside of bonds is yield. This often means that if the value of the bonds declines, you may still be able to break even in a relatively short period of time through monthly dividend payments.
In summary
Too many investors complacently park their cash in money market funds that currently yield more than 5%. This is a significant yield, but unfortunately it is unlikely to last, and yields on money market accounts tend to fall very quickly as rates fall. Based on plans laid out by the Federal Reserve, money market fund returns could be around 3% in 2026. That’s why I think it makes sense to accumulate this ETF now in case of a downturn. I will buy more aggressively if this fund returns to the 200-day moving average, which is near $44. With this bond fund, it is possible to secure a return in excess of 5% and, in doing so, position a portfolio for capital gains.
No warranties or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is provided for informational purposes only. You should always consult a financial advisor.
