Fidelity is an investment-fund mainstay for buy-and-holders, and several of its products are tailor-made for waiting out market storms.
This firm built its name on the back of exceptional portfolio managers. In more recent years, though, it’s broadened its appeal. Yes, Fidelity still is home to elite stock- and bond-pickers. But we can also get plain-vanilla index exposure as well as some cheekier “smart beta” strategies.
And we can get them for a song. Not only do many Fidelity funds boast fees that are below their category average, but they have low nominal purchase requirements, too. Like with all other exchange-traded funds, Fidelity ETFs can be purchased for the price of a share; however, most Fidelity mutual funds have absolutely no purchase minimum, meaning you can typically get started for as little as a buck.
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That means Fidelity’s defensive funds are some of the most accessible products you’ll come across.
How we chose the safest Fidelity funds
To find the safest Fidelity ETFs and mutual funds for a volatile market, we looked for those that represent some of the most useful defensive sectors and strategies, including those that contain the best dividend stocks or the best healthcare stocks. We also targeted funds with relatively low fees.
Many (but not all) defensive funds involve a simple tradeoff for their low volatility: better performance during downturns, but less robust returns during upswings.
For that reason, defensive funds don’t make for great long-term core allocations. They’re better used as “satellite” holdings to augment your portfolio, or if you’re more active, as shorter-term positions to ditch once markets normalize.
Data is as of July 12. Dividend yields represent the trailing 12-month yield, a standard measure for equity funds.
Fidelity Low Volatility Factor ETF
(Image credit: Getty Images)
- Type: Low-volatility equity
- Assets under management: $1.4 billion
- Dividend yield: 1.4%
- Expenses: 0.15%, or $15 annually for every $10,000 invested
The most obvious Fidelity fund to battle volatility is the one that says it right in the name.
The Fidelity Low Volatility Factor ETF (FDLO) tracks an index that owns large- and mid-cap stocks that are ranked based on three different measures of volatility: return volatility, earnings volatility and beta. Scores are adjusted based on market cap, and the stocks with the highest scores within each sector are eligible for inclusion.
However, FDLO uses the same sector weights as the broader market. Right now, for instance, this index fund is heavily weighted in technology stocks, financial stocks and communication services stocks – not exactly a who’s who of stability. Heck, its top holdings are S&P 500 mainstays Apple (AAPL), Alphabet (GOOGL), and Microsoft (MSFT).
But up and down the portfolio, you’ll see higher weights in less-volatile companies from those sectors, and an absence of certain explosive names. That shines through in a beta of 0.7 that suggests FDLO is 30% less volatile than the broader market, and shallower losses during downturns.
The flipside is the tradeoff you typically must accept in exchange for lower volatility: lesser returns over the long term. FDLO doesn’t climb nearly as aggressively when the market is climbing, which is what the market spends the majority of its time doing.
All that means is Fidelity Low Volatility Factor ETF (and other low-volatility ETFs) probably shouldn’t be the core of your portfolio. But if you’re looking to allocate some of your money to an investment whose downside isn’t so severe, FDLO fits the bill while allowing you to enjoy some market upside when things aren’t so chaotic.
Learn more about FDLO at the Fidelity provider site.
Fidelity MSCI Consumer Staples Index ETF
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- Type: Sector (Consumer staples)
- Assets under management: $1.4 billion
- Dividend yield: 2.2%
- Expenses: 0.084%
The flip side is, consumer staples companies aren’t exactly fonts of growth. If you get a promotion, you’re not going to start buying twice as much Charmin or stock up on Listerine, so there’s only so much boost these companies can get from economic boom times. So they often entice shareholders with generous dividends instead, and that income provides an additional element of stability—one that’s particularly attractive during periods of stock-market volatility.
Enter the Fidelity MSCI Consumer Staples Index ETF (FSTA).
We tend to think of FSTA in contrast to the top dog among the sector’s funds: the State Street Consumer Staples Select Sector SPDR ETF (XLP). XLP owns the S&P 500’s consumer staples companies, which comes out to about 35 predominantly large- and mid-cap stocks.
Fidelity’s fund tracks the consumer staples subset of a larger stock market index, resulting in a much broader selection of almost 100 names and more exposure to smaller companies in the space. But interestingly, FSTA also has higher concentrations of assets in mega caps like Walmart (WMT) and Costco (COST) compared to XLP.
In addition to stores, FSTA also holds the product producers you’d expect: Procter & Gamble (PG), Coca-Cola (KO), Mondelez (MDLZ) and other names that feature prominently in your pantry, laundry room or bathroom.
You’ll also find companies such as Marlboro parent Altria (MO) and alcohol giant Constellation Brands (STZ). As we pointed out when discussing a similar defensive Vanguard fund, “While you might not consider cigarettes and alcohol to be ‘necessities,’ people are just as loath to cut back on them as they are other staples.”
Going back to XLP comparisons, FSTA is a hair more expensive (XLP charges 0.08%) and tends to yield a little less by virtue of holding somewhat growthier small caps. Still, historically, it’s been a decent source of defense during market downturns, and it’s outperformed State Street’s fund over most significant timespans.
Learn more about FSTA at the Fidelity provider site.
Fidelity Select Telecom and Utilities Fund
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- Type: Multisector (Communication services and utilities)
- Assets under management: $1.4 billion
- Dividend yield: 2.1%
- Expenses: 0.68%
The aforementioned logic also applies to the utilities sector. You’ll cut back on virtually any expense to keep from having to shut off your electricity, heating gas or water. That’s why investors typically look toward utility ETFs for defense, too.
But if you really think about what modern-day Americans can or can’t live without, internet and phone service would also be extremely high up the list. That’s the thinking behind the Fidelity Select Telecom and Utilities Fund (FIUIX).
Pranay Kirpalani and Alex Boyajian have put together a roughly 50-holding portfolio that’s largely made up of utilities like NextEra Energy (NEE) and Entergy (ETR), but also holds a handful of telecoms like Verizon Communications (VZ) and AT&T (T).
Just like with consumer staples, utes and telcos don’t offer much in the way of growth, but they’re stable and throw off above-average levels of dividend income. That makes them a good source of ballast in choppy waters.
Learn more about FIUIX at the Fidelity provider site.
Fidelity Real Estate Income Fund
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- Type: Allocation
- Assets under management: $4.1 billion
- SEC yield: 5.0%*
- Expenses: 0.66%
One could make an argument for real estate as a hedge against market volatility. Physical real estate has extremely low correlation to the public markets, it’s less volatile than equities and it provides a high level of income.
But some of that case falls apart when we’re talking about real estate investment trusts (REITs), which also deliver substantial dividends but are more correlated to stocks and plenty volatile by comparison. Thus, traditional REIT sector funds aren’t exactly the best way to fight off volatility.
Fortunately, Fidelity Real Estate Income Fund (FRIFX) isn’t a traditional REIT sector fund.
FRIFX manager Bill Maclay operates what in reality is an “allocation” strategy, which means it holds more than one asset. Yes, it holds equity in some of the biggest and best REITs on the market, such as American Tower (AMT) and Welltower (WELL). But it also holds investment-grade and high-yield bonds, preferred stocks, even mortgage-backed securities. In fact, it’s mostly fixed income—common shares account for only about 20% of assets.
It’s certainly one of the best Fidelity funds for a volatile market, boasting far less wiggle and much more yield than most REIT-equity-only products out there. That’s to be expected. What’s more surprising is that despite FRIFX’s debt-heavy makeup, it’s been surprisingly competitive with traditional REIT funds over the long run.
Learn more about FRIFX at the Fidelity provider site.
* SEC yield reflects the interest earned for the most recent 30-day period after deducting fund expenses. SEC yield is a standard measure for bond funds.
Fidelity Low Duration Bond Factor ETF
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- Type: Ultrashort bond
- Assets under management: $1.9 billion
- Dividend yield: 4.1%
- Expenses: 0.15%
Still, some bond funds are steadier than others.
How volatile a bond fund is likely to be is strongly tied to its duration. Rather than reinventing the wheel, I’ll just hand it over to Kiplinger Personal Finance Senior Associate Editor David Milstead:
“The longer the term of the bond, the more sensitive its price is to interest rate moves. The measurement of a bond’s sensitivity to interest rate moves is called duration. The number is an estimate, typically expressed in years, of how long it will take a bond investor to get paid back. A longer duration means the bond’s price will move more when interest rates move. A duration of 6, for example, implies that if interest rates rise by one percentage point, the price of a bond will fall roughly 6%; the price will rise by a like amount if rates fall one point.”
In other words, the lower the duration, the lower the interest-rate (and overall) risk.
It’s pretty obvious, then, what Fidelity Low Duration Bond Factor ETF (FLDR) has to offer. This fund tries to own U.S. investment-grade floating-rate notes and U.S. Treasuries with a duration of 1 year or less. Right now, the portfolio is split roughly 85/15 between corporates and U.S. government debt, and its duration is 0.85.
How calm and collected is FLDR? Sometimes pictures tell a better story than words.
First up is a five-year chart showing the S&P 500; the iShares Core US Aggregate Bond ETF (AGG), a bond fund that trades a ubiquitous broad-bond index; and Fidelity Low Duration Bond Factor ETF.
(Image credit: YCharts)
And to get a better picture of just how smooth FLDR is compared to even other bonds, here’s a look at just FLDR and AGG.
(Image credit: YCharts)
Really helping Fidelity’s fund over the past few years is a relatively high yield for very short-term bonds. The ETF currently pays north of 4%.
Learn more about FLDR at the Fidelity provider site.
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