As ETF Assets Grow, Get Active Exposure to Bonds

Amid a 2023 market rally, exchange-traded fund (ETF) inflows had a banner year, putting the mutual fund industry further on notice that ETF popularity continues to grow exponentially. Furthermore, the move toward ETFs should increase investor exposure to active funds that focus on bonds.

The shift to ETFs wasn’t a sudden downpour; it was a steady trickle over time. Providers are seeing more of their ETF products gaining in assets, and that trend could persist.

“Over the past decade, ETF assets have surged substantially more quickly than the money sitting in mutual funds, data shows,” reported the Financial Times. “In fact, when looking at the 10 largest providers of both products, assets in ETFs have ballooned three times as quickly over the past decade as the money sitting in mutual funds, according to an Ignites analysis of data from Morningstar Direct.”

“Assets in ETFs, meanwhile, shot up 376 per cent during that time, reaching $7.29tn,” the FT report added.

With their expense ratios lower nowadays versus their passive counterparts, the accumulation of assets by active ETFs also saw a banner year in 2023. Given this, fixed income investors may want to reconsider active funds as part of their bond portfolio. In particular, the Vanguard Core Bond ETF (VCRB) is worth considering.

If credit risk is a top priority, VCRB addresses this by offering investors diversified exposure predominantly to the U.S. investment-grade bond market. That doesn’t mean sticking strictly within the safe confines of U.S. Treasuries. The ETF extends its exposure to other fixed income assets for diversification, including mortgage-backed securities and corporate securities. Again, with the active exposure that VCRB offers, investors are able to harness the portfolio management capabilities of the Vanguard Fixed Income Group with only a 0.10% expense ratio.

An Active Approach to More Yield

If investors are willing to turn up the risk dial to extract more yield and remain in an active fund, it doesn’t have to be expensive. With its 0.20% expense ratio, consider the Vanguard Core-Plus Bond ETF (VPLS). The fund offers investment-grade exposure similar to VCRB, but adds selective exposure to riskier credit profiles such as emerging market debt. That risk, however, is tempered with the fund’s active management.

With record issuance occurring in bonds in early 2024, the timing couldn’t be better for exposure to these active funds. Fixed income investors looking to temper bond volatility in an uncertain 2024 election year should consider this pair of options for stand-alone bond exposure or to complement a current portfolio.

For more news, information, and analysis, visit the Fixed Income Channel.