If You Hold This Bond ETF, You’re Making an Expensive Mistake

The Fidelity Total Bond ETF (NYSEARCA:FBND) sells itself arsenic a one-ticket solution for the enslaved sleeve of your portfolio. It is actively managed by Fidelity's fixed-income team, holds a wide swath of the investment-grade market, and Morningstar gives FBND 4 stars. Thus, it is successful the precocious tier retired of 496 funds successful the Intermediate Core-Plus Bond category.

The money has gathered astir $26 cardinal successful assets since its October 2014 launch. The question is whether investors thought hard astir why.

What you are buying

FBND tracks the Bloomberg U.S. Aggregate Bond Index arsenic its benchmark but does not replicate it. The portfolio runs 85% investment-grade bonds, astir 10% high-yield, and astir 3% emerging-markets debt, with the remainder successful cash. Duration sits astatine 6.02 years, weighted mean maturity adjacent 8.4 years, and the 30-day SEC output is astir 4.7%. That output looks tenable adjacent to a 10-year Treasury astatine 4.48%.

Performance has, successful fact, cooperated for holders. FBND is up astir 5.4% implicit the past twelvemonth connected price, against astir 4.9% for Vanguard's passive enslaved benchmark, the Vanguard Total Bond Market ETF (NASDAQ:BND). Over 10 years the spread widens, with FBND up astir 29% versus astir 17% for BND connected terms alone.

Why it's an costly mistake

FBND charges 0.36% successful yearly fees. BND charges astir 0.03%. That is astir 12 times the outgo for a class wherever progressive managers historically conflict to bushed the scale aft fees implicit agelong horizons.

Some terms outperformance reflects existent accomplishment from Fidelity's team. Some reflects the information that FBND takes much recognition hazard than the Aggregate benchmark, which has helped during a play erstwhile spreads person been choky and defaults rare. The mathematics compounds against progressive enslaved managers successful a mode astir investors underestimate. A interest differential that looks tiny successful immoderate azygous twelvemonth accumulates relentlessly implicit a multi-decade holding period, eroding the precise superior preservation bonds are meant to provide.

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