Unlock the Potential of Fidelity Limited Term Bond ETF

Performance Summary

Cumulative, annualized, and different time periods show diverse returns. For instance, the NAV Return Gross Expense Ratio is 0.25%, with figures like 3.65% for Cumulative, 5.43% for Annualized 3 Month, 9.43% for YTD, 1.43% for 1 Year, 1.97% for 3 Year, and 2.16% for 5 Year. Market Return also varies, with 3.70% for a certain period. These figures provide a clear picture of the ETF's performance over time.

When compared to other indices like the Bloomberg US 1-5 Year Government/Credit Bond Index (3.50% for various periods), the Fidelity Limited Term Bond ETF shows its unique characteristics. It also has a Fidelity Limited Term Composite Index with its own set of returns. Additionally, it is compared to Lipper Short-Intermediate Investment Grade Debt Funds Classification and Morningstar Fund Short-Term Bond.

Taxable Bond Market Review

In the third quarter of 2024, U.S. taxable investment-grade bonds had a strong rally. Steadily easing inflation and a cooling labor market led the U.S. Federal Reserve to implement its first policy interest-rate reduction after a period of monetary tightening. The Bloomberg U.S. Aggregate Bond Index gained 5.20% in three months.

The Fed's actions and inflation reports played a crucial role. After raising rates 11 times, it held steady for 14 months before cutting by 50 basis points in September. Inflation reports showed a slow receding trend, which changed market expectations. The index advanced in July and August with specific inflation and jobs reports. In September, the larger cut by the Fed led to further gains. Year to date, the index is up 4.45%.

During this period, bond yields fell as bond prices rose. The nominal 10-year U.S. Treasury yield dropped 55 basis points. Different sectors and bond types also showed varying results. Lower-quality investment-grade securities and long-term maturities performed well. At the sector level, various spread products had positive excess returns versus Treasurys.

Performance Review

Strategy: Sector Allocation

During the quarter, the bond market had broad-based gains, with yield-advantaged and credit-sensitive segments leading. U.S. investment-grade corporate bonds and agency mortgage-backed securities stood out. However, the fund's sector allocation detracted from its return versus the Fidelity Limited Term Composite Index. Non-composite allocations to securitized bond segments, especially commercial mortgage-backed securities, had a negative impact. In contrast, underweighting U.S. Treasurys helped relative performance.

Strategy: Security Selection

Among investment-grade categories, lower-quality and longer-term securities performed best. But the fund's security selection in investment-grade bonds weighed on performance versus the composite index. Picks among financial institutions, especially banking firms, and debt holdings within the industrial sector detracted from the relative result.

Strategy: Duration and Yield Curve

Yields declined across the maturity spectrum during the quarter, with the front end falling most. In September, the curve disinverted. The fund's yield-curve positioning detracted from relative performance as it was positioned further out on the yield curve than the composite. However, the fund's overall duration was generally in line with that of the composite index.

Outlook and Positioning

At quarter end, the global business cycle remained in expansion with a shift toward monetary easing and a stable earnings outlook. The U.S. Fed and other central banks have taken steps to ease rates. The U.S. economic expansion shows both mid- and late-cycle dynamics. Near-term recession risks are muted, but a full pivot to a disinflationary mid-cycle environment is uncertain.

As of September 30, about 73% of the ETF's assets were invested in corporate bonds. The portfolio had significant allocations to different sectors like industrial companies (about 36%) and financials (about 32%). It also had an 11% non-benchmark allocation to asset-backed securities. The portfolio was notably underweight U.S. Treasurys compared to the Composite index.

In a dynamic market environment, the goal is to find attractively priced bonds while managing risk. Investing is a long-term endeavor, and the focus is on generating strong risk-adjusted performance over a full market cycle.