Transcription
buy Fidelity's FXNX or individual treasuries instead.
Hello, Diamondstic members, super savers, and course fans. I hope you're healthy and well.
So, with everything that's going on in the world currently, we've been getting more questions from our community about how you can keep your core portfolio safe while potentially earning a bit of extra return on top. Specifically, many of you have been asking about FXNAX, Fidelity's popular US bond index fund, which is showing a 4.3% 30-day SEC distribution yield at the time of this taping on April 18th, 2026. And you're wondering whether investing in FXNAX is as safe as investing in treasuries directly.
So, with that in mind, here are the three topics I'll be covering today. One, what do you need to understand about FXNAX or any other funds you're interested in? Two, how can you compare FXNAX's returns to direct investment in individual treasuries? And three, will we personally choose FXNAX or a similar term treasury?
And while we will be focusing primarily on FXNAX in this video, the methodology we'll be walking through can be applied in principle to other bond funds that you may be interested in. Let's dive in now, folks.
What do you need to understand about FXNAX or any other funds you're interested in? Let's set aside returns and expense ratios for the time being. We'll get to that shortly. Personally, when I look at a fund, there are three key aspects that I want to understand before anything else.
First, what is the fund investing in? In the case of FXNAX, Fidelity's intermediate core bond index fund, the fund overview section tells us that FXNAX seeks to provide investment results that correspond to the aggregate price and interest performance of the debt securities in the Bloomberg US Aggregate Bond Index, and it continues normally investing at least 80% of the fund's assets in bonds included in the Bloomberg US Aggregate Bond Index. The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade US dollar denominated fixed rate taxable bond market.
So, let's take a quick look at the portfolio composition to see what this actually means. This table on Fidelity's website per March 31st, 2026 tells us that FXNAX holds 45.46% US treasuries, as well as a smattering of US agencies, these 0.24% here, and a small 2.48% of other US government related bonds. These will basically all be explicitly or implicitly guaranteed by the federal government, as will the majority of the mortgage back securities in the portfolio. These 23.89% of MBS pass through bonds here. For VIP investment club members, please check out our mortgage back securities miniseries here in the member zone if you want a refresher on MBS.
Moving on to corporate bonds. These make up 25.67% of FXNAX's portfolio. And from this portfolio holdings list, the latest on their website at the time of this taping, we can see that the largest corporate bond positions are from Morgan Stanley, Verizon, and City Bank. We won't go through the portfolio line by line for FXNAX in today's video, but if you want to do this for the fund that you're interested in, now you know where to find this information.
So, in addition to corporates and the other different types of fixed income instruments we just mentioned, there are also some small positions of asset-backed securities (ABS) and commercial mortgage-backed securities. These will all be investment grade because remember, the index tracks only investment grade fixed rate US bonds. However, they will generally not be backed by the US government either explicitly or implicitly.
So, that was the first key aspect I want to understand when I look at a fund. What is the fund investing in?
The second key aspect that I would want to understand is what is the credit risk rating of FXNAX. We couldn't find an overall rating for FXNAX on Fidelity's website. However, they show this little table on their summary page that, as we already expected, confirms that most of the portfolio per March 31st, 2026 was 70.4% US government risk, and that the other bonds are all investment grade with a rating of triple B or better. And if you don't want to do the math yourself on what this credit rating composition means for the overall credit rating of FXNAX, you can go to the free Morningstar website where they show this double A average credit rating for the fund at the time of this taping.
At the current time, the United States and its treasuries carry a double A+ or equivalent rating from S&P, Moody's, and Fitch. So, this slightly lower double A rating overall is not surprising given that there are, among others, 12.52% of single A and 9.73% of triple B in the portfolio as well.
Let's now look at the third key aspect that I would want to understand about the fund. What is the average maturity of FXNX? To find this information, we can go back to Fidelity's summary page and scroll down to this portfolio data table. And here we can see the weighted average maturity of FXNAX was eight years per March 31st, 2026, the latest available at the time of this taping, which is in line with what we would expect for an intermediate bond fund.
So, now we know three key points about FX NAX. First, it is a broad-based ETF that tracks almost the entire investment grade US dollar denominated fixed rate taxable bond market. This translates into a portfolio with a majority of US treasuries and other explicitly or implicitly government-backed bonds, but with about a quarter of private sector corporate bonds and related securities as well. Second, FX NAX's average credit rating is double A, so maybe one notch below the US government's current double A plus, but still a very solid investment grade. And third, FX NAX's weighted average maturity is eight years. Please keep in mind that these are the latest numbers at the time of this taping per April 18th, 2026. They change all the time though, so please check for the latest updates whenever you're watching this video.
And let's move on now to the next part of today's discussion. How can you compare FXNAX's returns to direct investment in individual treasuries?
Let's look now at FX and AX's returns as I promised before. And let's begin with total returns, as this is where holding a fund is always different from buying individual bonds and holding them to maturity. As our Diamond Nest members and regulars know, total return numbers reflect both the capital gains and losses of the fund, essentially the changes in the fund's share price, as well as any payouts, cash payments to the fund owners. Total returns are already net of expenses, which means for FXNAX, you don't need to deduct the modest 2.5 basis points in expenses that it charges per year.
Again, this table from Morningstar shows us that the annual total returns have been fluctuating in line with bond yields and bond prices over the past years. We see highs of 8.48% in 2019 and 7.8% in 2020 when rates went down steeply. Remember, it's always rates down, prices up for bonds. Then FXNAX had a bad year with a total annual return of minus 3% in 2022 when the Fed reversed course and raised rates again to fight inflation. The fund showed a more moderate but still positive return of 1.34% in 2024 as rates stayed elevated. After that, we saw a bit of volatility again, driven mostly by rate changes and expectations, up 7.13% in 2025 and so far up 1% for 2026 at the time of this taping per April 18th, 2026. As expected, these numbers are all very similar, although not 100% identical to both the underlying index and comparable funds in the market, the category line here.
That said, I know that some of you may care less about any price changes in the fund, but are more concerned with the payouts of the fund. How much in cash FXNAX pays to its owners every year. And this is indeed the key measure if you're investing in a bond fund to build an income stream for retirement or any other purpose. To measure these cash payouts and the cash payouts only, the financial industry has developed the concept of the distribution yield. How much in cash a fund pays out per year measured as a percentage of the fund's share price. And just like for the total return, the cost and expenses of the fund are already deducted.
Now, there are several ways of calculating the distribution yield, each with their own pros and cons. For the purposes of today's video, let's look at the 30-day SEC yield, or 30-day yield for short. The 30-day yield tries to estimate the distributions, the cash payouts you might be expecting over the next year from FXNAX if you bought it at the latest available price per share. As I just mentioned, the 30-day SEC yield is just one way of evaluating a fund's distribution yield. If you're interested in learning more about how to evaluate a fund, then check out this recent video on fund performance metrics linked below. It includes the formulas used and their limitations.
So, back to FXNAX and its 30-day yield. The important thing you need to remember is that the 30-day yield is based on historical data and that it is not guaranteed in any way, shape, or form. Past performance is not indicative of future results or events, as we always say. And the 30-day yield is a textbook example for this rule. And by the way, this is a very important difference to bonds that you own directly because if you buy an individual treasury directly, for example, it will pay you exactly the coupon that it promises until it matures under a standard no default assumption. We'll come back to this later.
So, Fidelity's website shows us a 30-day yield of 4.3%, which was the latest available data at the time of this taping per April 18th, 2026. Is a 4.3% 30-day yield good or bad? Well, as so often in life, that depends on what you compare it to. But for the purposes of this video, we will be looking at the yield that you would get if you bought US treasuries directly.
As our diamond nest community knows, treasuries are generally considered risk-free for almost all practical purposes. Plus, they're also regarded as the most liquid investment in the world. And that's why treasuries are so often used as the basis for comparing other investments against. Why treasuries are considered the benchmark for financial markets all over the world.
Now, the average maturity of FXNAX is 8 years, as I explained before. But there are no treasuries that are issued with such a maturity at auction. So, to keep it simple, let's look at the 7-year Treasury, which shows a yield of 4.04% at the time of this taping on the Treasury's daily Treasury par yield curve rates page.
So, an estimated 4.3% 30-day yield for FXNAX or a guaranteed yield of 4.04% for the 7-year Treasury. What do you think? Are these differences large enough to make you consider FXNAX over individual treasuries? Or is it the other way around? For me personally, these 20 odd basis points in potential difference are not enough to sway me towards buying a bond fund like FXNAX versus an individual treasury directly.
So, let's move on to the next part of today's discussion to see what might sway me in one direction versus the other. Would we personally choose FXNAX or a similar term Treasury?
Now, my personal inclination aside, there's some good reasons why an investor would consider a bond fund like FX and AX. First, a fund gives you immediate diversification across an entire portfolio of underlying investment grade bonds, even for the smallest investment amount. For example, you can buy a share of FXNAX for around $10 per share at the time of this taping. Whereas the minimum investment required to buy an individual Treasury bond is typically at least $1,000 on the leading brokerage platforms and $100 on Treasury Direct. The latter of which comes with other disadvantages, such as if you ever wanted to sell that Treasury.
The second reason for considering a bond fund, you don't have the time or knowledge to learn about buying individual bonds, or perhaps you just want someone to take care of it for you. A bond fund gives you professional management. And third, bond funds are generally liquid, especially when compared to holding individual corporate, municipal, and or foreign bonds. However, this may be less relevant if you own mostly treasuries, which in our mind, as I stated earlier, continue to be the safest, most liquid investment in the world for all practical purposes.
That said, and as many of our diamond nest egg regulars know, I'm generally a big fan of buying individual bonds and holding them to maturity. This investing approach gives you three main advantages. What we here at Diamond Neste call the three C's of buying individual bonds. The first C is for clarity. You know what bonds you own in your portfolio and why you own each one, so you won't have any sudden surprises here. The second C is for control. Control over the bond selection process. You decide what to buy, as well as control over the amount and timing of interest payments and principal repayments. And the third C is for cost. You may have some unavoidable transaction fees for individual bonds, but you won't have to pay for external managers and their overhead.
Bond beginners, folks, please refer back to the bonus videos here on why buy individual bonds and why buy bond funds for a refresher on anything we'll be talking about here today. Bond masters, folks, please refer back to module 5 and in particular these videos here on individual bonds versus bond funds for more details.
And these three C's, clarity, control, and cost, are the reasons that I would probably go for a direct purchase of treasuries in such a case where the portfolio and risk profiles aren't that different. But the difference in yield is just so small. Because if I buy treasuries directly and hold them to maturity, I have the following advantages over an investment in FXNAX or any comparable fund. My yield and my interest payments are locked in. I know at the time of purchase what my overall yield will be to maturity, how much in interest payments I will get, and when I will get them. Remember, this is not the case for FXNAX or any other fund where the managers can and do buy and sell bonds on an ongoing basis, which may impact yields and interest payments for the future. The 30-day yield, to say it once more, is calculated based on historical data and not a forward-looking guarantee in any shape or form.
And this point about the certainty in interest payments and cash flows can be especially important for an investor who is close to or already in retirement and relying on those cash flows for their daily living. With treasuries that I own directly, I will also get a big principal repayment at maturity that I can plan for, whereas a fund never matures and I'll have to sell the funds at the then current market price if I ever need the money or want to exit for any other reason. And finally, the ratings for treasuries are still one notch above the average rating for FX and AX, a function of the lower rated paper that the fund adds to its portfolio to diversify and maybe get a slightly higher yield, as we discussed earlier. And of course, the interest earned on treasuries is 100% exempt from state and local taxes when held in a normal taxable brokerage account. While FXNAX has a large portion of bonds whose interest will be fully taxable at all levels if held in a normal taxable brokerage account, including the MBS and the corporate bonds in the portfolio. And if you live in California, Connecticut, or New York and have FXNAX in a normal taxable brokerage account, do note that last year in 2025, this fund did not meet the minimum investment in US government securities required to exempt the distribution from tax in those states.
Now, that's me. And as I always say, everyone's financial journey is different. So, you'll need to decide for yourself what's best for you based on your individual circumstances, goals, and expectations. Drop a comment below and let me, Marcus, and the community know, is your preference for FXNAX or individual treasuries? And what do you hold in your fixed income portfolio, primarily bond funds, individual bonds, or a relatively even combination of both?
And as always, we'd love to invite you to come join our private VIP investment club and to continue the conversations with me, Marcus, and our other VIP members. And to learn about what others like yourself are doing right now to protect and grow their nest egg, visit our website at www.diamondstake.com and click on this yellow private VIP investment club button to learn more about the latest happenings in our growing member community. I've linked everything below this video for you as well.
All right, diamond estic members, super savers, and course fans. I hope you enjoyed today's video and learned something new. And see again very soon with more brand new wealth building content for your financial journey.