It’s Been a Strong Decade for Passive Investing, But Can it Continue?

2020 will more than likely see the active versus passive debate rage on when it comes to ETFs, but it’s difficult to deny a decade of dominance by passive funds. With their low-cost strategies attracting investors, can passive investing beat out active funds for another 10 years?

“The ETF universe has grown sixfold since the end of 2009 to almost $6tn today, according to data provider ETFGI,” a Financial Times report noted. “Investor interest been fuelled by rising focus on cost — ETFs usually cost a fraction of actively managed, traditional mutual funds — and the continued inability of most active fund portfolio managers to beat their benchmarks.”

One area that has been experiencing marked growth the past decade is fixed income ETFs. They’ve allowed investors to access the bond markets via an ETF wrapper without having to directly buy the debt itself.

“Although equities have been at the core of the shift towards ETFs, bond variants have also advanced at a strong clip in recent years,” the FT report stated. “Fixed income markets are generally considered less efficient and benchmarks easier to beat for skilled fund managers. The backdrop of a ravenous investor appetite for bonds since the crisis has helped traditional active bond fund managers enjoy healthy inflows — in sharp contrast to their equity colleagues.”

“S&P’s scorecard indicates that most active bond funds also underperform markets in the longer run, however,” the FT report added. “Coupled with the ease of trading fixed income ETFs — which means they are used by many active bond funds as well — this has helped them grow as quickly as equity ETFs in 2019, with both categories taking in more than $200bn this year.”

Passive ETF Bond Exposure

Since 2003, the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) has been the go-to fund for investors who want that core bond exposure, and with close to 20 years under its belt (not to mention $67 billion in assets under management), AGG is still a great option.

Fund facts:

  • AGG seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index.
  • The index measures the performance of the total U.S. investment-grade bond market.
  • The fund generally invests at least 90% of its net assets in component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the economic characteristics of the component securities of its underlying index.

Reasons to use AGG:

  • Broad exposure to U.S. investment-grade bonds
  • A low-cost easy way to diversify a portfolio using fixed income
  •  Use at the core of your portfolio to seek stability and pursue income

With Treasury yields near lows thanks to the central bank cutting interest rates this year, AGG might not be the best option for yield-started investors. However, for those looking for overall bond exposure–say, for a 60-40 capital allocation strategy, using an ETF like AGG would help especially given the amount of investment-grade debt issues it holds.

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