Fidelity Brings ESG to Its 529 Plan

Fidelity Brings ESG to Its 529

August 3, 2022

Fidelity has introduced five new sustainable options to its 529 college savings plan. The new multi-asset options will be made available to investors in Connecticut, New Hampshire and Massachusetts, and they will be offered in the Fidelity Advisor 529.

We’ve found that 529s can be a powerful tool for clients who’d like to contribute to a child’s or grandchild’s education. The state-sponsored savings plans have many tax advantages and can be a useful estate-planning tool. (To learn more about 529s, read this 529 FAQ or our special report on saving and paying for college.)

We’re not so sure, however, that adding ESG options to 529s is a chocolate-and-peanut-butter combination. As we’ve explained before, the broad umbrella of causes and concerns that fall under the header of “ESG” make it tricky to measure whether a company’s practices are truly in line with investors’ values. And while many companies that have produced solid investment returns over the years also score well on ESG measures, as a whole, ESG funds have tended to trail the broader market.

Though increasingly popular with investors, only a handful of 529 plans offer ESG-screened fund options for college savers. Research last year from AKF Consulting found 26 ESG options available among 21 state plans. The Fidelity options invest in issuers with “proven or improving sustainability practices” or in index funds designed for environmental, social and governance investing; the typical allocation is 70% to equities and 30% to fixed income.

Chart of the Week: How the Bond Market Prices In Fed Policy

Interim Chief Investment Officer Jeff DeMaso

This chart shows the yield on the 3-month T-bill from the end of 2021 through July 27, 2022 as well as the upper bound of the target fed funds rate.
Note: Chart shows daily yields for three-month Treasury bills alongside the upper bound of the Federal Reserve’s target range of the fed funds rate from 12/31/21 through 7/27/22. Source: The Federal Reserve Bank of St. Louis.

Traders and investors spend a lot of energy trying to predict the Fed’s actions. The Fed also spends a fair amount of effort telegraphing what it is planning to do; an unwritten policy is to try to avoid “surprising” the market. The result? By the time the Fed acts, bond traders have more often than not already priced in the move.

You can see this in the chart below, where I’ve plotted the yield of the three-month Treasury bill alongside the fed funds rate (specifically, the upper bound of the Fed’s target range). The two rates largely move together—no surprise there. The key insight, though, is that the T-Bill’s yield leads the fed funds rate.

So the Fed hiking rates last week made headlines, but for bond investors it was already old news.

 

Why Bonds, Why Now? 

Senior Vice President, Fixed Income Manager Chris Keith

The U.S. bond market was down 10.3% through the first half of this year. What’s worse, bonds fell in tandem with stocks, causing many investors to wonder if bonds had lost their power to protect portfolios and act as a dependable hedge against volatility.

The good news for bond investors is that the market rebounded in the second half of June and continued to make gains in July. The Bloomberg U.S. Aggregate Bond index was up 1.7% month-to-date through July 27.

The even better news for long-term investors is that bonds have a special quality that sets them apart: They are self-healing.

What do I mean when I say bonds are self-healing?

Well, the mechanism is simple: When you buy a bond, you are getting an investment asset that has a known outcome. Individual bonds have a maturity date. And when they get to that date, they mature at “par,” or 100 cents on the dollar. In short, the issuer has to pay back the money they borrowed on a specific date. This basic dynamic occurs even when interest rates are rising. So long as the borrower doesn’t default, the only way you’ll get less than the bond’s par value is if you sell before it matures.

Therefore, putting money back into the bond market even when rates are rising is not throwing good money after bad. Reinvesting principal and interest may sound counterintuitive as you see market values decline on existing positions. But by waiting it out and reinvesting, we eventually see the self-healing nature of bonds on display: Rising rates lead to higher bond fund yields and higher income payouts. To be clear, this may take time, but bond investors can afford to be patient because they get paid interest while they wait.

Let’s see how this played out for a real-life two-year Treasury bill over the six months before it matured at the end of June.

This chart shows how bond prices "self-heal" as they reach maturity, even if the bond market is falling.
Note: Chart shows daily market value (bond price) for the two-year U.S. Treasury 0.125% that matured on 6/30/22 as well as the daily cumulative return for the iShares Core U.S. Aggregate Bond ETF (bond market return) from 1/3/22 through 6/30/22. Sources: Bloomberg, Morningstar

Over the period shown, the Treasury bond’s price fell and then recovered to par value even though rates were rising and the bond market was declining during the entire period. This quality is not unique to Treasury bonds—the same thing happens with municipal and corporate issues.

Seeing your bonds fall in price is never fun, but due to their contractual nature, bond prices will heal if only given time to do so.

Bond fund investors benefit from this phenomenon through a different means. The typical bond fund has no final maturity date and rising rates lead to lower share price NAVs, but they also lead to higher bond fund yields and distributions. When reinvesting bond fund distributions, you are acquiring additional shares at lower prices with higher yields. Your bond fund may hold hundreds or even thousands of bonds (Vanguard’s Total Bond Market Index fund had over 10,000 positions toward quarter-end) but make no mistake—a bond fund’s underlying positions have the same self-healing nature as individual bonds.

In other words, bonds continue to do their job. In the most difficult days, bonds produce income and balance risk. Even as the market value of our bonds fell along with the major indices in the first half of this year, bonds continued to earn and pay interest when due.

Adviser’s Takeaways

In recent Takeaways, Senior Research Analyst Liz Laprade discussed the S&P’s big July bounce, and Liz also sat down with Chairman Dan Wiener to discuss the likelihood of recession and other econ news.

We hope you find these episodes engaging and accessible, and please let us know if there are any topics you’d like us to address by sending an email to info@adviserinvestments.com!

About Adviser Investments

Adviser Investments is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.


Disclaimer: This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Our statements and opinions are subject to change at any time without notice and should be considered only as part of a diversified portfolio. Mutual funds and exchange-traded funds mentioned herein are not necessarily held in client portfolios. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

You may request a free copy of the firm’s Form ADV Part 2A, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

The Adviser You Can Talk To Podcast is a registered trademark of Adviser Investments, LLC.

Figures related to number of clients and assets under management are as of December 31, 2021.

For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here.

© 2022 Adviser Investments, LLC. All Rights Reserved.

Adviser Investments' logo is a registered trademark of Adviser Investments, LLC.