Before you branch out and invest in individual stocks or other investments, make sure to ground your portfolio with a dependable base of core investments. It is important that your portfolio’s foundation has a good allocation of stocks and fixed income to weather turbulent economic conditions and markets. This is where a collection of index funds can easily provide that foundation for beginner — and even experienced — investors.
Now, my specialties involve economic and market data as well as developments, and in turn, the best individual securities from stock, bond and other markets to capitalize on those developments for safer growth and income. This is what I showcase in my Profitable Investing now well into its 31st year of publication.
But, having a solid foundation of funds is important. That’s why I recommend index funds in my allocation for stocks and fixed income And I also have a collection of model mutual fund portfolios, including specific portfolios for funds of individual families like Fidelity and Vanguard. I do this to guide subscribers who want or need to stay within fund families.
Let me now show you how I line up the index funds from Fidelity for a well-grounded portfolio foundation.
Stocks, Fixed Income and Cash
To start, I currently allocate 56% of my portfolio to stocks and 44% to fixed-income investments. In that 44% I include 11% in cash. This allocation is different than the 60%/40% balance typical of asset allocations for many managers. But, I have been a bit more conservative ahead of the current lockdown and novel coronavirus challenges.
Let me start with stock allocations. I continue to believe that the U.S. remains the prime market of the globe. The U.S. has been hit hard by lockdowns, but unlike the rest of the major markets, the U.S. has the Federal Reserve. The Fed has been throwing trillions into the economy and markets. Plus, President Donald Trump’s administration got Congress to add trillions more to aid the economy.
So, my allocation is focused on the U.S. right now. This is different from my decades of global focus while I was in banking and asset management.
Here are my top seven index funds from Fidelity for a solid portfolio foundation:
- Fidelity High Dividend ETF (NYSEARCA:FDVV)
- Fidelity MSCI Real Estate ETF (NYSEARCA:FREL)
- Fidelity US Utilities ETF (NYSEARCA:FUTY)
- Fidelity Select Software & IT Portfolio Open-End Fund (NASDAQ:FSCSX)
- Fidelity MSCI Health Care Index ETF (NYSEARCA:FHLC)
- Fidelity High Income Fund (NASDAQ:SPHIX)
- Fidelity Intermediate Municipal Income Fund (NASDAQ:FLTMX)
Index Funds: Fidelity High Dividend ETF (FDVV)
FDVV and S&P 500 Total Return
The starting point for core U.S. stocks with Fidelity is the Fidelity High Dividend ETF. This is an indexed exchange-traded fund that is supposed to track Fidelity’s Core Dividend Index. This index focuses on U.S.-listed stocks which pay higher average dividends.
This is my more measured approach to the S&P 500 as the higher weightings on dividends makes the fund less vulnerable to downturns and volatility.
The ETF is newer to the market as it debuted in September 2016. And since then — particularly during 2019 — the more tech-heavy S&P 500 outpaced the more dividend-focused ETF. But my view is that I want to achieve a lower volatility and lower risk return over time, and not to have a base which is too heavy on a particular sector.
And that makes the Fidelity High Dividend ETF a good start to building a grounded portfolio.
Fidelity MSCI Real Estate ETF (FREL)
FREL and S&P 500 Total Return
Next in my stock allocation is real estate investment trusts (REITs). With index funds, you can accomplish this with the Fidelity MSCI Real Estate ETF.
REITs have recently come under fire with lockdowns, but these hard-hit REITs are in very specific sectors such as retail. With low inflation, funding costs are reduced for overall sustained profitability for most other REITs in the market including for data transmission towers and data center REITs.
And REITs continue to provide less risk as they are mainly focused on U.S.-centric assets away from the global economic troubles. As noted above, low inflation and largely dependable revenues feed more valuable dividend income.
For all of 2019 and into 2020, the Fidelity REIT ETF was generally outperforming the S&P 500 on a very consistent basis. FREL dropped during the selloff in March, but it has been returning as more investors eye the market’s fundamentals.
And with a dividend yield of 4.9%, the ETF out pays the S&P 500 by a significant margin. With consistency based on real assets and defended dividend income, REITs in the ETF are a great way to achieve measured growth with higher income — aiding a well-grounded portfolio.
Fidelity U.S. Utilities ETF (FUTY)
FUTY and S&P 500 Total Return
Now I move to another traditionally defensive source for growth and income in the U.S. market with utilities. Through index funds this is done with the Fidelity U.S. Utilities ETF. The ETF attempts to track the MSCI USA IMI Utilities Index, which in turn tracks larger U.S. utility stocks.
Like for REITs, U.S. utilities are insulated from global woes and continue to capitalize on the reliability of the country even during the lockdowns.
The best utilities are combinations of regulated local services and unregulated wholesale businesses. Combining dependable revenues and profit margins with added growth and income makes for a great way to generate rising income and dividends with growth over time.
The return for FUTY since coming to the market in October 2013 is a positive 82.3%, which is line with the return for the S&P 500. However, FUTY has been less volatile than the S&P 500 over several stretches. And even during the stock chaos this year, utilities continue to do well with ample income and resumed growth.
Like for REITs, FUTY has a much better yield than the general S&P 500 at 3.6%.
Select Software & IT Portfolio Open-End Fund (FSCSX)
FSCSX and S&P 500 Total Return
Now I come to a more exciting part of the U.S. market — information technology. Technology has always been a big growth engine for the U.S. economy, and the stocks in this segment reflect optimism for higher returns. I accomplish this allocation in index funds with the Fidelity Select Software & IT Portfolio Open-End Fund which follows the MSCI Word Software & Services Index.
Technology is the alchemy of the market. Whether products come from silicon or the minds of app and software developers, profits can be achieved in momentous amounts. But not all new technology works, and there are always new products and services making for volatile markets.
So, while investors need exposure, it should come as part of a broader portfolio.
The technology market has been a good one for a long time, and FSCSX has turned in a return over just the past trailing 10 years of 569.5%. It has outpaced the S&P 500 more than two to one.
And during the recent and current market chaos, technology has become one of the go-to sectors — continuing to outpace the general market. This shows how FSCSX can help build a grounded portfolio.
Fidelity MSCI Health Care Index ETF (FHLC)
FHLC and S&P 500 Total Return
Covid-19 and the following lockdowns provide proof of the importance of healthcare and healthcare companies. From pharmaceutical companies to biotechnology companies, healthcare is another side of technology that humans and investors depend upon.
In the index fund world, Fidelity has its Fidelity MSCI Health Care Index ETF. The ETF and the underlying index have the sector well-covered.
FHLC has returned 116.3% since coming to the market back in 2013. This performance is superior to that of the S&P 500. The index fund’s outperformance is particularly visible this year as healthcare becomes vital to the economy and markets.
And FHLC even has a slightly better yield than the general S&P 500. The combination of growth and income from healthcare provides another foundation block for your grounded portfolio.
Fidelity High Income Fund (SPHIX)
SPHIX and Bloomberg Barclays US Aggregate Index Total Return
Fixed income in the U.S. had its selloff in March only to surge back. The U.S. has very low inflation, and that inflation faces very few threats. This has led to lower yields and higher bond prices overall. But I continue to advocate for corporate bonds and municipal bonds as part of a well-grounded portfolio.
Corporate bonds are gaining immense traction with the Fed’s bond-buying program. Plus, more institutional investors are doing their credit analysis of businesses and bolstering their buying, resulting in higher bond prices.
My allocation to this market through index funds is in the Fidelity High Income Fund. This open-end fund that reportedly attempts to track the ICE Bank of America High Yield Index has returned 77.2% over the trailing 10 years. That significantly outpaces the general U.S. bond market as tracked by the Bloomberg Barclays U.S. Aggregate Index.
Fidelity Intermediate Municipal Income Fund (FLTMX)
FLTMX and Bloomberg Barclays US Aggregate Index Total Return
Then for municipal bonds I have the Fidelity Intermediate Municipal Income Fund. This is an open-end fund that supposedly tracks the Bloomberg Barclays Municipal Bond Index.
Municipal bonds have been gaining like their corporate peers. Tax revenues are up, aiding the credit of issuers. Low inflation aids bonds as well. And issuance has been muted as many issuers have not had the need or the political will to sell more bonds. Oh, and even with the economic troubles from the lockdowns, municipal issuers are generally still in better shape going into the troubles.
FLTMX’s return holds up well against the U.S. Aggregate Bond Index done by Bloomberg Barclays over the past trailing 10 years. Its return reversed during the selling in March, only to turn around sharply.
Municipal bonds have the best credit history of any bond sector besides U.S. Treasury bonds. And while some are questioning the budget strife that is and will challenge state and local authorities, Fed lending and muni bond buying will go far for this market.
And note, even if you invest in qualified investment accounts, I still recommend this open-end fund for total return — and not just for tax-free income — as the municipal bond market is a value right now.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine … one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.