Investors will also have to consider credit risk, or the possibility that a bond issuer could default. Fixed-income traders typically measure the risk by taking a bond’s yield and the yield of an equivalent maturity U.S. Treasury note, or what is commonly known as the credit spread. Among fixed-income assets, high-yield speculative-grade debt securities show the greatest credit spread, which is not surprising since the debt assets would have to be attractive enough to compensate investors for the added credit risk.
While many investors may be used to their active fund investments, some of their active manager’s strategies may take little active risk and effectively mirror a benchmark. These closet benchmarkers are also charging hefty fees for their relatively passive strategies.
“Such managers can be readily replaced using ETFs that provide low cost exposure to a benchmark,” according ot the BlackRock analysts.
For instance, the average expense ratio on a U.S.-listed ETF is 0.59%, and the cheapest index-based stock ETF has a 0.04% expense ratio, according to XTF data.
Investors can still go with an active fund if the manager has proven to deliver active returns, or alpha, but the industry has not provided much confidence of late – according to S&P Capital IQ Fund Research, 80% of running large-cap mutual funds have underperformed the S&P 500 in 2014. [Why Active Funds Are Underperforming Index ETFs]
For more information on investing with ETFs, visit our ETF 101 category.
Max Chen contributed to this article.