Advisors and ETF industry observers know that one of the fastest-growing segments in ETF Land is at the intersection of active management and fixed income. Whether it’s by way of mutual-fund-to-ETF conversions or more new ETFs coming to market, the population of active bond ETFs has swelled in recent years.
More importantly, so has the assets under management tally for those products. That could be a positive sign for funds like the ALPS/SMITH Core Plus Bond ETF (SMTH) and the ALPS Intermediate Municipal Bond ETF (MNBD). SMTH has ridden the wave of active management/bond ETF success. The fund turns two years old in December and already has $1.94 billion in assets under management.
That’s impressive when considering SMTH is an aggregate bond strategy. That’s a crowded corner of the bond ETF space. And it’s one that’s largely occupied by passive, low-fee funds. SMTH’s fast start could be a sign that it and stablemate MNBD are poised to reap rewards as the global market for active fixed income ETFs is poised to swell to $6 trillion by 2030, according to J.P. Morgan Asset Management.
Encouraging Outlook for MNBD, SMTH Growth
MNBD and SMTH could be at the right place at the right time for multiple reasons. Those include the fact that equities still dominate in terms of overall ETF assets. And that implies there’s room for bond funds to play catch-up.
“ETFs have played a pivotal role in modernizing the fixed income market. The global fixed income market is at a pivotal moment, offering unique opportunities for diversification, which can be accessed through actively managed ETFs,” noted J.P. Morgan. “This year, globally, active ETFs have captured 37% of the flows within fixed income ETFs, despite only accounting for 15% of the total fixed income ETF AUM.”
It’s not a stretch to see MNBD and SMTH notching long-term growth. The global bond market is valued at $141 trillion, making it significantly larger than equity markets. Then there are retirement considerations. Thousands of baby boomers retire daily. As they age, many look to lower risk in their portfolios while improving income prospects. Active bond ETFs accomplish those objectives.
The Allure of Unconstrained Approaches
Adding to the cases for MNBD and SMTH is the allure of unconstrained approaches to the vast fixed income market. Simply because index-based fixed income ETFs provide exposure to a large amounts of bonds under one umbrella doesn’t mean those products are delivering the best opportunities to investors.
“Fixed income indices also have their limitations given their rules-based construction. For example, the Bloomberg U.S. Aggregate Index, which is often viewed as a proxy for the US Bond market, represents only about half of the U.S. public bond market and excludes asset classes such as high yield corporates and non-agency MBS,” added J.P. Morgan. “Passive products that follow these inadequate indices then [pose]further complications by using benchmark replication which often requires samplings and leads to variations in replicating an index.”
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