Rising rates in 2023 changed the environment significantly for fixed income. Suddenly, investors were chomping at the bit to add more bonds to their portfolios, particularly in short-maturity strategies, as yields became more attractive. Of course, with rate hikes likely near an end, that changes which strategies may appeal.
Enter Fidelity Low Duration Bond Factor ETF, FLDR. Morningstar recently upgraded its Medalist Rating from Silver to Gold. The strategy’s yield and investment process make it an intriguing option entering 2024.
FLDR seeks to track the Fidelity Low Duration Investment Grade Factor Index for a 15 basis point fee. The index focuses heavily on floating rate notes (FRNs) but has a small allocation to U.S. Treasuries with seven- to ten-year maturities.
FRNs, for those who don’t know, are less sensitive to interest rate changes than longer-duration bonds, as their coupon is tied to a market rate, such as SOFR, and resets regularly. The fund’s FRN exposure is complemented by its small allocation to longer-maturity fixed-rate U.S. Treasuries. This provides diversification benefits concerning the rate’s term structure and credit spreads compared to a pure FRN strategy.
This strategy has helped FLDR provide an SEC yield of 5.87% as of November 27th, a healthy yield for those willing to accept risk incrementally higher than the risk found in cash or money market funds. However, to put this incremental risk into context, the strategy holds high-grade securities as its benchmark requires bonds to be rated investment grade for inclusion.
The low duration ETF has returned 5.4% YTD per VettaFi data, outperforming its ETF Database Category and Factset Segment Averages per VettaFi. It has also seen its AUM rise more than 35% over the last year.
Low Duration ETF FLDR’s 2024 Case
So, why look to FLDR entering 2024? Firstly, while the Fed has paused, rates remain at elevated levels for now. The central bank has also been on record indicating they retain the right to hike further should inflation tick upward. While unlikely, that remains a consideration and a potential benefit due to FLDR’s FRN exposure. Secondly, while rate cuts might be a distant concern, in the event the Fed lowers rates, the Treasury portion of FLDR’s portfolio is likely to benefit due to its longer duration.
Investors revisiting their fixed income allocations have options, and the low duration ETF FLDR is one to consider. Its returns and combination of FRNs and longer-dated U.S. Treasuries can appeal to those looking for potential income with relatively low risk.
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