Pay Attention to the Risks Your Bond Fund Is Taking

Emory Zink: Within the intermediate-term bond category, investors may choose from a broad menu of options, and while the variety is encouraging, it behooves an investor to pay attention to the idiosyncrasies of funds.

For example, AB Intermediate-Term Bond and Fidelity Intermediate-Term Bond may appear similar at first glance. Both manage duration closely to their respective benchmarks, and both are biased toward higher-quality holdings versus their typical category peer. Yet, if you take a closer look, the funds source opportunity from different places. The Fidelity fund uses the Bloomberg Barclays Intermediate Government/Credit Index as its benchmark, which tends to be less interest-rate sensitive than AB's Bloomberg Barclays US Aggregate Bond Index benchmark, the typical benchmark for the broader category. While both funds hold mortgages, Treasuries, and corporates, AB Intermediate-term bond has the flexibility to take more risk in a variety of areas, including more complex structured products, high yield, and non-U.S. dollar currencies. As of June 2017, the 12-month SEC yield on AB sits at 2.4% versus 1.9% for Fidelity.

What does this mean for investors making a selection? In a year such as 2013, which included the Fed's taper tantrum, Fidelity's lower sensitivity to interest-rate risk helped it to stave losses versus the typical intermediate-term bond category peer and AB. Yet in 2016, when risk-on favor was rewarded, AB, handily outpaced the typical peer and Fidelity.

Either fund has merits, but they are not identical, and investors should pay attention to the type of risks that they are comfortable taking if choosing between them.