There are a few reasons that fixed-income assets do well when they are indexed, and the main focus is on relative returns. Ron Ryan, in a guest post for Index Universe, has five other reasons this structure is preferable:
- Asset Allocation. Bond index funds, Ryan says, are the best representation of the intended risk/reward of the fixed income asset class.
- Fees. The cost savings over time can add up when bonds are indexed; the fees to manage bond indexes are generally lower than those of active management.
- Tracking Error. ETFs generally have less tracking error.
- Transparency. Returns are published daily; active managers generally only publish quarterly or monthly returns. Daily return publishing leads to fewer surprises later on.
- Cost Effective. The hire and fire mode of active management is costly, as asset managers are not cheap. By indexing bonds, this cost can be reduced. In that same vein, a bond ETF can also give investors wider exposure at a lower cost. To buy the kind of diversification one bond ETF can give would often be prohibitively expensive for most investors.
Ryan is the co-founder and CEO of Ryan ALM Inc., an index provider and research firm.
For more stories about bond ETFs, visit our Bond ETF category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.