Fidelity Opens Fixed-Income Factor ETFs & Lessons from Vanguard's 401(k) Shakeup - Adviser Investments

Fidelity Opens Fixed-Income Factor ETFs & Lessons from Vanguard’s 401(k) Shakeup

Low Duration Bond & High Yield ETFs Flesh Out ‘Smart Beta’ Offerings

Call them “smart beta” or “factor,” but whatever the name, Fidelity’s got two more of them for investors—this time in the fixed-income space.

The new exchange-traded funds (ETFs) both focus on niche areas of the bond market.

The Low Duration Factor
Fidelity Low Duration Bond Factor ETF (ticker: FLDR) tracks an in-house, actively managed index, which in turn comprises investment-grade (i.e., high-quality) floating-rate notes with maturities under five years and Treasury bonds with maturities in the seven- to 10-year range. The fund charges 0.15% a year in expenses and investors on Fidelity’s platform can trade them commission-free.

Fidelity states the goal of the portfolio is to balance interest-rate and credit risk to provide a better risk-reward profile than a “traditional” floating-rate-note index or fund. The idea is that the high credit-quality bonds it selects will take care of the credit piece, while the floating-rate-note component will help Fidelity manage interest-rate risk and provide the “low duration” factor in the fund’s name. Here’s how.

Floating-rate notes’ income payouts are not fixed like a traditional bond’s, but instead go up or down based on a benchmark like the prime rate or a Treasury bill’s yield—for this reason, they are less sensitive to changes in interest rates.

Why? Because of the inverse relationship between a bond’s price and yield. When yields go up, prices go down and vice versa. Since floating-rate notes’ yields adjust to changes in interest rates, their price doesn’t take the same hit in response to interest-rate moves. As a result, floating-rate notes typically have lower durations than traditional bonds with similar maturities, as the size of their income payouts resets based on interest rates on a regular basis.

Duration is a measure of a bond fund or ETF’s risk from rising interest rates, measured in years. The higher the duration, the greater the risk if interest rates rise. When it comes to measuring duration risk, the rule of thumb is that for every 1% increase or decrease in interest rates, a fund will see its value rise or fall by 1% for every year of duration. So, for example, a fund with a duration of 5 years would suffer a price decline of 5% if interest rates rose 1%. As discussed, Fidelity’s new ETF seeks to temper that risk for investors.

Seeking High Income
Fidelity High Yield Factor ETF (FDHY) has the goal of providing a high level of income and some potential for growth. Eighty percent of the portfolio will typically be invested in below-investment-grade bonds (also known as “junk” bonds). Fidelity is using a computer-based model to screen bonds to buy, focusing on those with the best return potential and the lowest probability of default. The people behind the machines will then actively select among the pool of approved bonds to reduce trading costs.

Like the Low Duration Factor ETF, High Yield Factor ETF can be traded commission-free for investors on Fidelity’s brokerage platform. The ETF charges 0.45% a year in fees.

Fidelity’s Factor Lineup
The new funds flesh out Fidelity’s factor ETF lineup, which includes eight U.S.-focused portfolios and two foreign ETF offerings.

We remain a bit skeptical of the entire “smart beta” or “factor” movement—in some cases, fund providers’ motivation seems to be more about marketing than creating high-quality investment products. Time will tell how successfully Fidelity and other fund companies’ offerings deliver for investors.

Vanguard Eliminates Employee Access to 12 Funds

Unless you work for Vanguard, this story might not seem relevant to you. But bear with us.

Last week, we learned that Vanguard is changing the funds lineup in its internal 401(k) plan. The headlines noted that the Malvern, PA fund behemoth eliminated employee access to its iconic 500 Index fund (along with 11 other funds).

The move is intended to shift money in the funds being dropped into the firm’s Target Retirement funds, a lowest-common-denominator approach to saving for retirement that uses a single metric, year of planned retirement, to dictate portfolio allocation.

Not So Select Anymore
Of the dozen funds excised from the 401(k) plan, eight are what Vanguard calls “Select” funds. These are funds that Vanguard says have a combination of low costs, diversification, size and longevity that will accrue to investors’ benefit in a portfolio.

There are currently 21 funds on Vanguard’s Select list, which includes four broad-market stock and bond index funds, two money market funds, four short- and intermediate-term bond funds, two balanced funds, six U.S.-focused stock funds and three international stock funds. The list includes both actively managed and index funds, and they are denoted by special “S” symbols on Vanguard’s website. Opinions vary on whether all of the funds included are truly the best Vanguard has to offer. We feel the list is hit or miss, and some of the misses are big ones.

Keep Your Retirement Savings Strategy on Track
Why should the funds available to Vanguard employees in their plan matter to you? Aside from wondering why some funds are promoted as “Select” enough for retail investors but not worth offering to its own employees in the 401(k) plan—you’d have to ask Vanguard that—it’s a good reminder to all retirement-plan investors of how important it is to regularly review the options in your own plan and stay on top of your personal investment allocation.

It is not uncommon for companies to make adjustments to their retirement plans every so often, which can include the lineup of funds offered, the fees charged or even a wholesale change to another provider with all new rules and options to consider and react to (also something to consider when you change jobs).

This is why we recommend reviewing your 401(k) plan options and personal allocation carefully and regularly. It’s worth your while to make sure that you’re investing in a portfolio that will help you reach your goals and is in line with your risk comfort level. You should also pay attention to the fees in your plan—there has been a trend in recent years for larger companies to lower the costs of their plans and provide decent low-cost funds to their participants, but there are still some companies that need to catch up. It’s still not uncommon for plans to have high, uncompetitive fees or lackluster investment choices.

The Adviser Investments Advantage
If you feel like your company’s 401(k), 403(b) or other retirement plan options are not up to par and would like some advice, we’re here to help. We’ve advised many clients on how best to allocate their retirement plan portfolios and we also provide comprehensive advisory services to companies looking to improve their plans.

Whether you’re an individual investor or a business owner or board member, we’d be happy to review your retirement plan. Please contact us today at info@adviserinvestments.com or call us toll-free at 800.492.6868.

About Adviser Investments

Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual funds, ETFs, fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, trusts, foundations and institutions meet their investment goals. Our minimum account size is $350,000. For the fifth consecutive year, Adviser Investments was named to Barron’s list of the top 100 independent financial advisers nationwide and its list of the top advisory firms in Massachusetts in 2017. We have also been recognized on the Financial Times 300 Top Registered Investment Advisers list in 2014, 2015 and 2016.

For more information, please visit www.adviserinvestments.com or call 800.492.6868.

Please note: This update was prepared on Friday, June 15, 2018, prior to the market’s close.

Disclaimer: This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations, personal investment advice or considered an offer to buy or sell specific securities. 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.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

The Barron’s rankings consider factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. This award does not consider client experience and is not indicative of future performance.

Editors at the Financial Times bestowed “elite” status on 300 firms in the U.S., as determined by assets under management, asset growth, longevity, compliance record, industry certifications and online accessibility.

© 2018 Adviser Investments, LLC. All Rights Reserved.

Next Up

Truly Personalized Wealth Management

Tailored advice, every time.

Contact Us

85 Wells Avenue, Suite 109 Newton, MA, 02459

info@adviserinvestments.com 1.800.492.6868

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