Before investing, consider the investment objectives, risks, charges, and expenses of the mutual fund, exchange-traded fund, 529 plan, Attainable Savings Plan, or annuity and its investment options. Contact Fidelity for a prospectus, offering circular, Fact Kit, disclosure document, or, if available, a summary prospectus containing this information. Read it carefully.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.
Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.
The securities of smaller, less well known companies can be more volatile than those of larger companies.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility, as well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of exchange-traded notes). The degree of liquidity can vary significantly from one ETP to another and losses may be magnified if no liquid market exists for the ETP's shares when attempting to sell them. Each ETP has a unique risk profile, detailed in its prospectus, offering circular, or similar material, which should be considered carefully when making investment decisions.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.
Market risk. FRCS are subject to price fluctuation due to events affecting the issuer or the market. Additionally, FRCS prices typically decline on ex-dividend days—the dates that buyers of FRCS are not entitled to receive the dividend. Interest rate risk. When interest rates rise, FRCS tend to fall in value. When interest rates fall, FRCS generally increase in value.
Credit and default risk. Investors face the same risk of default as they would with a corporate bond—the company could become unable to pay investors interest or repay principal. FRCS are deeply subordinated, however, so actual recovery rates in the event of default may be much lower than senior securities. Purchasing top-rated securities from companies with a stable or good credit history may help reduce credit risk.
Call risk. FRCS generally have a call provision that entitles the issuer to redeem the shares prior to maturity, returning the principal to the investor but eliminating the option of continued income from the FRCS. Typically an issuing corporation will call its securities when interest rates fall, which means the investor will likely face less favorable reinvestment possibilities. When evaluating FRCS, an investor should know whether call options exist and when these options may be exercised by the issuer. Maturity extension risk. Although most FRCS have long maturities to begin with, many come with an option for the issuer to further extend the maturity date. Although this extension is generally limited to a maximum of 49 years, that may be beyond what many retail investors want. Special event risk. The income paid to investors is tax-deductible to the issuer of the FRCS. If a change in tax law lessens or eliminates the corporation’s tax advantage, the company could execute a "special event" redemption option. This allows the issuer to redeem the securities at the liquidation value in the event of an unfavorable tax change.
Deferral risk. Companies issuing FRCS are allowed to defer income payments without declaring default if the issuer experiences financial difficulties. Payments may be deferred or suspended for a stipulated period. The deferred income may accrue during the period of suspension and could be paid later, but this could pose some tax issues for the investor. In the case of non-cumulative FRCS, deferred payments do not accumulate, and the issuer is under no obligation to pay the missed payments in the future. Investors should read the original prospectus to understand the structure of their FRCS investment. Inflation risk. Like bonds, investors in FRCS are subject to the risk that the yield paid from time of purchase to the time the FRCS matures or is called may not pay more than the rate of inflation in the same period. Even if the FRCS return does exceed the rate of inflation, inflation can reduce the value or purchasing power of the income received.
Liquidity risk. Although owners of FRCS should find it possible to find a buyer under most market conditions, it is nonetheless a fairly illiquid market with the risk of variations from anticipated valuations, particularly when interest rates rise or markets are volatile.
Lower yields -Treasury securities typically pay less interest than other securities in exchange for lower default or credit risk.
Interest rate risk - Treasuries are susceptible to fluctuations in interest rates, with the degree of volatility increasing with the amount of time until maturity. As rates rise, prices will typically decline.
Call risk -Some Treasury securities carry call provisions that allow the bonds to be retired prior to stated maturity. This typically occurs when rates fall.
Inflation risk -With relatively low yields, income produced by Treasuries may be lower than the rate of inflation. This does not apply to TIPS, which are inflation protected.
Creditor default risk -Investors need to be aware that all bonds have the risk of default. Investors should monitor current events, as well as the ratio of national debt to gross domestic product, Treasury yields, credit ratings, and the weaknesses of the dollar for signs that default risk may be rising.
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