Bond Index vs. Fidelity Total Bond or Core Bond Strategy

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Topic Author
tarbucks
Posts: 2
Joined: Tue Jan 14, 2020 9:48 am

Bond Index vs. Fidelity Total Bond or Core Bond Strategy

Post by tarbucks » Tue Jan 14, 2020 10:26 am

I'm deciding on the best options for the bond portion of my portfolio within my IRA (I'm retired). I'm gravitating to index funds for much of my equity allocation but I wonder if index funds are always the best strategy for bonds, even considering lower expense ratios.

I currently have mostly Fidelity Total Bond fund (but also Limited Term Bond and Corporate Bond). Expense ratios are 0.45 but the 10 yr return after fees for Total Bond is 4.5%, higher than comparable index funds Intermediate Treasury Index (3.9%) and U.S. Bond Index (3.7%). The duration for Total Bond is 5.3 yrs vs. 6.3 yrs and 5.7 yrs. for the two index funds.

My Fidelity advisor is suggesting Fidelity's Core Bond Strategy as an alternative. This is a managed portfolio of individual, investment grade bonds with an average duration of 4.7 yrs so slightly lower risk on average than the comparable index funds. My first thought was high fees but the 0.40% expense ratio is lower than Total Bond but of course higher than index funds. The track record is difficult to judge as the strategy was initiated in 2018 (9.2% one yr return vs. 8.1% for U.S. Aggregate index) and the fact that it's individually tailored.

I'm leaning against (but still open to) the Core Bond Strategy due to the uncertain track record and the fact that with a $500K minimum ties up quite a lot. I do realize the advisor has an incentive here but that does not mean it's not a good option as they select the types and grades of bonds in the mix. I like the simplicity and low expenses of index funds but what if, as in this case, their performance is lower than managed funds or portfolios?

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Bond Index vs. Fidelity Total Bond or Core Bond Strategy

Post by livesoft » Tue Jan 14, 2020 10:48 am

No one can predict the future which is what you are ultimately asking us to do. I think if one takes on more risk, then one may get a higher performance in the long haul and if one takes on more costs then one can get a lower performance in the long haul. There really is no such thing as a free lunch. So if you take on more risk and more costs, then you can get about the same performance.

Thus, it probably doesn't matter what you do. If anyone tells you otherwise, then I would be very suspicious.
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Topic Author
tarbucks
Posts: 2
Joined: Tue Jan 14, 2020 9:48 am

Re: Bond Index vs. Fidelity Total Bond or Core Bond Strategy

Post by tarbucks » Tue Jan 14, 2020 1:13 pm

I was asking for opinions on bond index vs. managed funds or portfolios, realizing the general preference here for index funds. I'm not clear on your post - the bond index funds I mentioned were of slightly longer duration so slightly higher risk with respect to interest rates at least. A primary question is what the case is for an bond index fund that slightly underperforms a managed fund after fees are taken into account. Additionally, whether anyone has thoughts or experience regarding the Core Bond Strategy or something similar (i.e., a tailored portfolio of individual bonds). Why is a managed fund or portfolio more risky than a bond index fund?

livesoft
Posts: 69557
Joined: Thu Mar 01, 2007 8:00 pm

Re: Bond Index vs. Fidelity Total Bond or Core Bond Strategy

Post by livesoft » Tue Jan 14, 2020 1:23 pm

tarbucks wrote:
Tue Jan 14, 2020 1:13 pm
Why is a managed fund or portfolio more risky than a bond index fund?
Manager and management risk.
https://www.investopedia.com/terms/m/managementrisk.asp
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