A seasoned trio of comanagers leveraging the firm's deep resources leads Fidelity Limited Term Bond ETF's FLTB credit-focused yet risk-conscious approach to short-term bonds. This disciplined approach coupled with low fees makes this strategy an attractive offering.
Comanagers Rob Galusza, Julian Potenza, and Dave DeBiase pool their expertise to position this portfolio. Potenza replaced former manager and corporate-bond specialist David Prothro on this strategy in late 2020, a change meant to formally reflect the day-to-day management of the strategy. Potenza is named on the rest of Fidelity's limited-term suite, and his background as a financials credit analyst is leveraged in the strategy's corporate allocation, which regularly holds banks and financial institutions. DeBiase's prior experience trading mortgages and corporate bonds complements the experience of Galusza, a 30-year veteran and head of the firm's limited-term suite of bond funds. The managers draw upon the firm's broad resources, which include credit and securitized analysts, traders, and dedicated quantitative specialists.
This strategy courts more credit risk than its typical short-term bond Morningstar Category peer with greater-than-average corporate credit exposure; the portfolio’s allocation to corporates stood at 59% of assets as of June 2023, roughly 18 percentage points more than its typical peer. That said, the team keeps to some sensible guardrails: Below-investment-grade exposure is capped at 5%, and no interest-rate bets with the duration kept close to the strategy’s benchmark, the Bloomberg U.S. 1 -5 Year Government/Credit Index. The strategy invests across government, corporate, and securitized bonds and maintains a modestly longer duration than the category norm, which adds to its interest-rate sensitivity. When compared with its mutual fund counterpart, the portfolio’s securitized allocations are smaller, while its U.S. Treasury holdings remain larger to provide more liquidity for this exchange-traded vehicle. For the trailing 12 months through June 2023, the ETF's 20% average allocation to U.S. Treasuries was almost double that of its fellow open-ended fund. 
Extra helpings of credit and interest-rate risk benefit the portfolio when rates are low and credit spreads tighten but will hurt the strategy when credit sells off and when interest rates spike. Amid 2022's higher rate volatility and economic uncertainty, the exchange-traded fund lost 5.9% and trailed more than three fourths of its distinct category peers. That said, the avoidance of significant credit pitfalls and sticking to internal guardrails have helped the strategy keep its losses in check and outperform when risk is rewarded, such as in 2019 and later in 2020. For the year to date through June 2023 as the credit market rallied, the ETF's 2.3% gain outpaced its benchmark by more than 70 basis points and was almost in line with its category median.

Analyst Rating

A compelling choice for credit-biased short-term bond exposure.

Analyst

Saraja Samant

A disciplined yet flexible approach with consistent execution upholds this strategy's Above Average Process rating.
This strategy was restyled from an intermediate-term bond strategy to a limited-term bond strategy in late 2013 (the open-end mutual fund launched in 1984, the ETF in October 2014). Fittingly, it moved into the short-term bond category, but unlike its counterpart and category peer, Fidelity Short-Term Bond FSHBX, this strategy has more flexibility to add credit and interest-rate risk. The team uses an 80/20 blend of the Bloomberg 1-5 Year Credit and Bloomberg 1-5 Year Government indexes as a reference point for sector allocations as opposed to most category peers that track the Bloomberg U.S. 1-3 Year Government/Credit Index. As a result, it tends to be more credit-heavy and interest-rate sensitive than most category rivals. That said, the team prefers high-quality corporates and caps below-investment-grade fare at 5% of assets. 
Along with high-quality corporates, agency mortgages, and U.S. Treasuries, the managers invest in out-of-index sectors such as asset-backed and commercial mortgage-backed securities, and collateralized mortgage obligations, which the team is well-equipped to analyze. Because these allocations are relatively less liquid, the ETF typically holds less of these and more U.S. Treasuries than its mutual fund counterpart. The team pays careful attention to security selection, with the support of Fidelity's deep analyst bench, and manages duration close to the strategy's benchmark.

Above Average

Process

This is a large and experienced team. A seasoned team of portfolio managers and the collective expertise of Fidelity's deep bench of analysts, traders, and dedicated quantitative resources support an Above Average People rating.
Consistent with Fidelity’s team-based approach across its fixed-income portfolios, this strategy is managed by a collaborative team of portfolio managers with complementary skill sets. Fidelity veteran Rob Galusza acts as the internal lead on this strategy, providing both experience and consistency across the limited-term suite. He first joined the strategy in 2009 and initially worked alongside core bond manager Ford O'Neil. David Prothro, comanager of Fidelity Corporate Bond FCBFX since mid-2010, replaced O'Neil when the strategy was repositioned from an intermediate-term to a limited-term bond strategy in late 2013, and Julian Potenza, who is named on the rest of Fidelity's limited-term suite, took Prothro's place here in late 2020. Potenza joined the firm in 2007, and his prior experience as a credit analyst covering the financial sector is leveraged across the suite. Dave DeBiase, a former mortgage and corporate-bond trader who arrived at Fidelity in 2006, joined the management roster here in November 2018, after first being appointed to Fidelity Intermediate Bond FTHRX in October 2017. His trading background provides an informed perspective on liquidity.
The managers draw on research provided by Fidelity's extensive analyst group, including a team of 20-plus credit analysts, as well as a bevy of structured products analysts, quants, traders, and macro researchers. This is a stable team with no recent turnover of any key contributors.

People

Fidelity earns an Above Average Parent rating because of its ability to stay ahead of its competition.

The firm's successful stock-picking mutual funds fueled its rise to prominence, and it has adapted well to investor preferences that have shifted markedly over the past two decades. Index funds and exchange-traded funds have garnered most of the industry's flows as money has gushed from actively managed products—Fidelity's included. Yet overall, the asset-management division has continued to achieve positive organic growth by introducing or maintaining aggressive pricing on its own suite of passively managed funds and expanding its menu of client-demanded investment structures, such as managed accounts and collective investment trusts. These moves are made possible by the firm's strong distribution network, scale, established brand, and willingness to tolerate losses on some products in pursuit of broader strategic objectives.

The firm is not without blemishes. It could stand to rationalize its lineup of active equity funds and do better to maintain continuity in an equity fund's portfolio construction as the fund's leadership inevitably changes.

Overall, the firm has served its funds' investors well. It boasts a topnotch fixed-income division and remains home to some of the industry's most talented equity managers and a strong team supporting its well-run target-date series.

Parent

Fidelity Limited Term Bond ETF

FLTB is an actively managed, broad-based bond fund with a primary focus on investment-grade credits and a targeted average maturity between two and five years.

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