The second half of 2024 appears increasingly favorable for actively managed bond ETFs. Michael Plage, CFA, portfolio manager at Fidelity Investments, talked active fixed income investing in the Third Quarter Fixed Income Symposium hosted on the VettaFi platform.
Top of mind this quarter for Plage as an active manager are inflation, employment, and the Fed’s reaction to data pertaining to the two.
“The Fed has been driving volatility in the fixed income markets really since 2022,” Plage explained. “It does look like they’re going to cut rates later this year and probably next year, but it’s really dependent on the data that’s coming in.”
Actively managed ETFs have come a long way since their initial inception. Plage described the need for broad, fundamental education just a decade ago when Fidelity launched its first actively managed ETFs. These included the Fidelity Total Bond ETF (FBND), the Fidelity Corporate Bond ETF (FCOR), and the Fidelity Limited Term Bond ETF (FLTB).
With just $10 billion in aggregate active ETFs in 2014, the educational needs were high. For Plage, it included educating the SEC, boards of trustees, and others about how active management translates into an ETF, compares to mutual funds, and more.
Fast-forward 10 years, and advisors and investors are embracing the proliferation of actively managed ETFs. Fidelity expanded its active fixed income ETF suite with the Fidelity Investment Grade Bond ETF (FIGB) in 2021. The firm also launched the Fidelity Tactical Bond ETF (FTBD) last year.
“The momentum, not only in fixed income but in active and in ETFs, has really picked up quite a bit in 2024,” said Plage. “I don’t see it slowing down.”
The Limitations of Passive Bond Investing Creates Opportunities
The Bloomberg US Aggregate Bond Index remains the popular benchmark for investment-grade bonds. The Index tracks approximately $28 trillion in assets, an “impressive” amount according to Plage, but a pale comparison to the $58 trillion across the U.S. bond market. “There’s twice as many bonds outstanding as there are in the benchmark, in this index that people try to replicate through passive strategies.”
It leaves the door open for possible outperformance for active bond managers. Pulling from a larger potential universe than the benchmark creates a wider opportunity set for active managers. Beyond just that, active management allows for discernment in exposures.
Plage notes that, annually, a 10% differential in total returns exists between the best- and worst-performing fixed income asset classes. In some years, this may rise as high as a 25% differential, a performance divergence that passive bond investors must simply ride out.
“Over almost every time period, passive strategies generally fall in the bottom quartile,” explained Plage. “Most active managers can outperform a benchmark over time.” What’s more, these days, they generally do so net of fees.
Active managers can potentially capitalize on divergences and dislocations within bonds. Whether this happens through sector weightings or individual security selection depends on the manager and strategy.
“It’s an exciting time to be a bond manager, an exciting time to be an active manager, and it’s an exciting time to be a manager of ETFs,” declared Plage.
Active Fixed Income Investing With FTBD and FIGB
Fidelity’s active, fixed income strategies seek “idiosyncratic ideas [and]alpha opportunities” across sectors, issuers, and the bond universe.
The Fidelity Tactical Bond ETF (FTBD) seeks high current income and invests globally across bond sectors, types, and maturities. These include investment-grade bonds, high-yield bonds, emerging market bonds, floating-rate securities, and more.
The Fidelity Investment Grade Bond ETF (FIGB) seeks high current income. The fund invests in medium- and high-quality investment-grade bonds and seeks to offer interest rate risk similar to the Bloomberg U.S. Aggregate Bond Index. The fund invests across sectors and maturities in domestic as well as international bonds.
When investing, the management team for both funds considers the issuer’s credit quality and current and potential forward-looking valuations. They also consider features specific to the individual security and trading opportunities related to particular securities.
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