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.