Many investors are still sitting on the sidelines in cash, potentially missing out on the short duration fixed income segment.
Importantly, investors sitting in cash via money market funds have earned a compelling rate without taking on much risk. However, this move likely won’t be as rewarding going forward. With the current rate-cutting environment, now may be an opportune time for investors to take on some risk and extend duration with a short duration income ETF.
The Federal Reserve cut rates by a half percentage point last month, ending its 14-month pause period. This marks an easing cycle and the ideal time to rethink portfolio allocations. Historically, bond markets have performed well during cutting cycles, with fixed income investment historically outperforming cash during this time.
Investors may consider switching from cash to short duration income products like the Fidelity Limited Term Bond ETF (FLTB), the Fidelity Low Duration Bond ETF (FLDB), and the Fidelity Low Duration Bond Factor ETF (FLDR).
FLTB’s 30-day SEC yield is 4.86% as of Oct. 31. Meanwhile, FLDB’s 30-day SEC yield is 4.86%, and FLDR’s is 5.31%.
Under the Hood of the 3 Short Duration Fixed Income ETFs
FLTB is a short duration investment-grade bond strategy focusing primarily on U.S. corporate credit. The fund normally maintains a dollar-weighted average maturity of between two and five years.
FLDB invests in investment-grade debt securities of all types, normally maintaining a duration of one year or less. The fund focuses on securities of medium and high quality.
The actively managed FLTB and FLDB each rely on Fidelity Investments’ experienced portfolio managers, research analysts, and traders.
FLDR tracks an index comprising solely U.S. investment-grade floating rate notes and U.S. Treasury notes. The index blends these components together so that the portfolio maintains a duration of one year or less.
Floating-rate notes are less sensitive to interest rate changes than longer-duration bonds, as their coupon is tied to a market rate and resets regularly. FLDR’s floating-rate note exposure is complemented by its small allocation to longer-maturity fixed-rate U.S. Treasuries, providing diversification benefits compared to a pure floating-rate note strategy.
For more news, information, and analysis, visit the ETF Investing Channel.
Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
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