Fidelity High Yield Factor ETF’s $0.2740 Quarterly Dividend: A High-Yield Play With Caveats

The Fidelity High Yield Factor ETF (FDHY) has declared a quarterly distribution of $0.2740 per share, payable on May 1, 2025, to shareholders of record as of April 29. This marks the latest payout from an actively managed fund that has positioned itself as a yield-focused alternative to passive high-yield bond ETFs. But with a 6.81% annualized dividend yield and an expense ratio of just 0.35%, is FDHY a compelling income play—or does its strategy carry hidden risks?

The High-Yield Playbook: Strategy and Yield

FDHY aims to deliver income by investing at least 80% of its assets in below-investment-grade debt—commonly known as junk bonds—using the ICE® BofA® BB-B US High Yield Constrained Index as a benchmark. The fund focuses on securities rated BB or B (S&P) or Ba or B (Moody’s), emphasizing factors like valuation, quality, and momentum. This active approach has resulted in an annual dividend rate of $3.20 as of April 2025, outpacing the ETF Database Category Average of $2.35.

Ask Aime: "Is Fidelity's High Yield Factor ETF (FDHY) the right choice for investors seeking higher returns?"

The fund’s 6.81% annualized yield is a standout feature in a low-rate environment, but it comes with trade-offs. High-yield bonds are inherently riskier than investment-grade debt, with greater exposure to defaults and interest rate fluctuations. FDHY’s turnover rate of 177%—placing it in the 99.27th percentile of its peer group—suggests frequent trading, which can generate taxable capital gains distributions and eat into returns over time.

Cost Efficiency: A Competitive Edge?

FDHY’s expense ratio of 0.35% stands out. While passive rivals like the SPDR Bloomberg Barclays High-Yield Bond ETF (JNK) and the iShares iBoxx USD High Yield Corporate Bond ETF (HYG) charge 0.49%, FDHY’s lower fee gives it a cost advantage. The fund’s expense ratio also beats the ETF Database Category Average of 0.43% and the FactSet Segment Average of 0.51%.

However, active management isn’t free. The fund’s short tenure of its managers—with the longest-serving strategist having just under four years of experience—raises questions about consistency. Meanwhile, its 1-year return of 7.27% outperformed category and segment averages, but its 5-year return of 4.93% lagged behind the category’s 2.97% average. This inconsistency suggests FDHY’s success may hinge on timing and market conditions.

Risks and Considerations

The high yield of FDHY is a double-edged sword. While the $0.2740 quarterly distribution (equivalent to ~$1.096 annually) is attractive, it’s tied to the health of junk bonds, which can crater during economic downturns. The fund’s ESG score of 5.46/10—lower than many peers—also hints at limited environmental and social safeguards, a potential red flag for ESG-conscious investors.

Another concern is duration risk. With a focus on intermediate-term bonds, FDHY could face losses if interest rates rise sharply. The fund’s managers aim to mitigate this by emphasizing shorter maturities, but the strategy’s effectiveness remains untested in a prolonged rate-hike environment.

The Bottom Line: A High-Yield Bet for Aggressive Income Seekers

FDHY’s $0.2740 distribution and 6.81% yield make it a compelling option for investors prioritizing income, especially with its low expense ratio. The fund’s outperformance in shorter time frames and cost efficiency relative to peers are clear pluses.

However, the trade-offs are significant. The high turnover and reliance on volatile junk bonds mean FDHY is best suited for aggressive investors with a long time horizon and tolerance for volatility.

Final Take:
FDHY delivers a strong income stream at a reasonable cost, but its success hinges on the managers’ ability to navigate credit risk and interest rate cycles. For income-focused investors willing to stomach the risks, the fund is worth considering—but only as a small part of a diversified portfolio.

Conclusion:
The Fidelity High Yield Factor ETF’s $0.2740 distribution underscores its role as a yield machine in a low-rate world. With a 6.81% annualized yield and a 0.35% expense ratio, it offers value compared to passive alternatives. However, its high turnover, short managerial tenure, and exposure to junk bond risks mean it’s not for the faint-hearted. Use FDHY strategically—pair it with safer income assets and keep an eye on credit spreads and interest rate trends. The payoff could be substantial, but so could the downside.