Some investors argue that actively managed funds are better capable of navigating through the fixed-income market. However, passive index-based bond exchange traded funds may do just as well, if not better, as active strategies.
“In the first eight months of 2015, investors added $37 billion into fixed income ETFs compared to the $85 billion for equity ETFs,” according to Todd Rosenbluth, S&P Capital IQ Director of ETF & Mutual Fund Research. “Though there are still a smaller number of highly liquid ETF choices for investors to consider, we think the driver behind the fund flow difference is that many investors believe that active management works better than passive with bonds. Unfortunately the data does not fully support this adage.”
Yields on benchmark 10-year Treasury notes were as high as 2.47% in June but traded below 2.0% earlier this year, “creating a recipe for astute active managers to outperform,” Rosenbluth said – yields and bond prices have an inverse relationship, so a rising yield corresponds with falling prices.
Active managers, who had a finger on the market pulse, could have diminished their bond fund durations to diminish the risk of rising rates. Meanwhile, index-based ETFs with a set target strategy cannot shift duration exposure to limit interest rate risks.
However, according to S&P Dow Jones Index Versus Active (SPIVA) research, over the one-year period ended June 2015, nine in ten active fixed-income mutual funds underperformed the Barclays benchmark index.
Additionally, a paltry 1.2% of government long funds outperformed the Barclays Long Government index over the past one-year period, and only 15% outperformed the benchmark in a five-year period. [Active Fund Aches: Are Passive ETFs More Profitable?]