As investors consider ways to adapt their fixed income portfolios in a shifting market environment, some may look to actively managed bond exchange traded funds that are more capable of navigating the changing tides.
“Actively managed funds offer investors the opportunity to outperform the market, while most index funds underperform the market net of fees,” according to a Fidelity research note. “Even seemingly small amounts of excess return can lead to significantly better outcomes for shareholders, while prolonged periods of outperformance may lead to dramatically improved results through the compounding of excess returns.”
Fidelity Investments argued that there are four reasons to consider active bond ETFs for a diversified portfolio: a focus on returns after fees, well-informed managers, more than just a bond index, and additional tools to generate returns and manage risks.
Successful active fund managers have the flexibility and proven skill set to outperform passive funds over time. For instance, managers can take credit fundamentals into consideration in accessing a bond’s risk, which can better gauge the value of a debt security.
Bond managers are also more informed than the average investor as they consider a broad spectrum of potential investments and utilize research analytics to differentiate sectors to look for the most promising picks.
A bond index is only a subset of a broader bond opportunity set. An actively managed portfolio could have the opportunity that is much larger than the passively managed portfolio bench-marked against the Bloomberg Barclays U.S. Aggregate Bond Index, or Agg, which is overweight government-guaranteed securities.
“Active managers do not have their hands tied,” Ford O’Neil, portfolio manager of the actively managed Fidelity Total Bond ETF (NYSEArca: FBND), told ETF Trends in a call. “They can identify securities with outperformance to be had.”
Since active managers are not as limited as traditional benchmarks like the Agg, active strategies have access to additional tools that can help generate excess returns and better manage risk. For example, O’Neil pointed out that FBND may include securities not found in the Agg, such as Treasury inflation-protected securities, high-yield debt, emerging market debt and municipal bonds.
Moreover, unlike stocks, individual debt securities are typically “over the counter,” where price movements are less driven by a number of investors trading on a public exchange, and many don’t even trade on any given day. This may cause inefficiencies in pricing, which may leave room for more informed and skillful active managers to add alpha or performance.
For more information on the fixed-income market, visit our bond ETFs category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.