Fidelity FSITX, holding MBS a bad idea?

[Dicast]

I was looking through my current holdings and of my bond allocation which is in the US Bond Index fund (FSITX) at Fidelity I noticed the fund holds around 27% of my funds in mortgage backed securities (MBS).  I know they do this to track the target index (Bloomberg Barclays US Aggregate Bond Index) but I'm questioning if it is good as a holding for my bonds area of my portfolio.  I would expect MBS to act more like equities in that they may suffer more along with the stock market than general bonds.  Does anyone have any thoughts? I am considering moving over to the Fidelity Intermediate Treasury Bond Index (FIBAX) instead.

I'm considering the 24% holding of corporate bonds in FSITX as a possible detractor as well.  I would prefer my bonds act like bonds as much as possible.

[VagabondMD]

Dicast wrote:

I was looking through my current holdings and of my bond allocation which is in the US Bond Index fund (FSITX) at Fidelity I noticed the fund holds around 27% of my funds in mortgage backed securities (MBS).  I know they do this to track the target index (Bloomberg Barclays US Aggregate Bond Index) but I’m questioning if it is good as a holding for my bonds area of my portfolio.  I would expect MBS to act more like equities in that they may suffer more along with the stock market than general bonds.  Does anyone have any thoughts? I am considering moving over to the Fidelity Intermediate Treasury Bond Index (FIBAX) instead.

I’m considering the 24% holding of corporate bonds in FSITX as a possible detractor as well.  I would prefer my bonds act like bonds as much as possible.

Click to expand...

You might be more comfortable with a Treasury only index. You can pick your duration (short, intermediate, or long) and avoid the credit risk. I personally do not have a problem with the aggregate bond index but sprinkle in some short term treasury index (FSBAX) to lower the duration and credit risk.

[AZdoc68]

Dicast wrote:

I was looking through my current holdings and of my bond allocation which is in the US Bond Index fund (FSITX) at Fidelity I noticed the fund holds around 27% of my funds in mortgage backed securities (MBS).  I know they do this to track the target index (Bloomberg Barclays US Aggregate Bond Index) but I’m questioning if it is good as a holding for my bonds area of my portfolio.  I would expect MBS to act more like equities in that they may suffer more along with the stock market than general bonds.  Does anyone have any thoughts? I am considering moving over to the Fidelity Intermediate Treasury Bond Index (FIBAX) instead.

I’m considering the 24% holding of corporate bonds in FSITX as a possible detractor as well.  I would prefer my bonds act like bonds as much as possible.

Click to expand...

There are several schools of thought on this I've read.

One is broadly diversify your bond allocation just like you would the stock portion.  Like you mentioned, the agg index pretty much does that in one fell swoop as it includes MBS, US govt bonds, corporates, etc.

Another school of thought is be super conservative in your bond allocation and "take your risk only on the equity side".  IOW, keep your bond allocation in short-term treasuries only which won't earn you much but is also about as safe as you can get in terms of capital preservation.  Those who advocate this say that by being super-conservative in bonds you can hold a higher overall percentage of stocks.

I can see some merit in both approaches.  Personally I'm more in the former camp, which is admittedly more complex, as I hold short and intermediate US govt bonds, corporate (both investment grade and hi-yield), muni-bonds, and TIPS.  I even have a 5% position in foreign bonds.

[AZdoc68]

NOTHING in this world is entirely "risk free" in the absolute sense.  NOTHING.  If there's a nuclear holocaust or a huge asteroid strike, no financial holding of any type (stocks, bonds, cash, gold, real estate) will have any value as there won't be anything left to buy.

Short-term T-bills are as close as it comes which is why they are very low-yielding.

What is your point?