Freedom to go beyond benchmarks

Bond indices can be blunt instruments: useful for broader exposure, but limiting when sharper tools are required. The Bloomberg US Aggregate Index, for example, excludes 49% of the $57.5 trillion US bond market, omitting areas such as non-agency mortgagebacked securities, high yield bonds, and leveraged loans. That leaves close to $28 trillion of assets outside the benchmark – markets where investment opportunities can be found.
 

Even within the index, rules-based construction has drawbacks. Market-value weighting means the most indebted issuers dominate portfolio allocations, regardless of credit quality. Passive ETFs tied to these benchmarks can therefore become concentrated in riskier borrowers and miss out on diversification. Active fixed income ETFs have the freedom to offer greater flexibility. Managers can rotate across sectors, adjust duration and credit risk as conditions change, and target spread opportunities in overlooked segments.

Active fixed income ETFs let managers reach well beyond the constraints of a benchmark. The ETF wrapper makes that flexibility easy for investors to access in a single, efficient trade.

Active managers can invest beyond the limitations of passive indices

Source: Bank of America, Bloomberg, SIFMA, J.P. Morgan Asset Management. The investable universe for Treasuries, municipals and other agency securities are sourced from SIFMA and reflect par value outstanding. The investable universe for agency MBS, CMBS, CMOs, CLOs, CDOs, ABS, investment grade corporates and high yield corporates are sourced from Bank of America and reflect market value outstanding. Treasuries include outstanding bills, bonds and notes. Agency MBS includes MBS, CMBS, and CMOs. Securitized includes ABS, CLOs, CDOs, non-agency CMBS and non-agency RMBS. Sector classifications for constituents in the Bloomberg U.S. Aggregate are based on classifications provided by Bloomberg. *Due to the exclusion of tax-free municipals from the Bloomberg U.S. Aggregate, municipals index representation is based on the Bloomberg Municipal Bond Index. U.S. Data are as of June 30, 2025.

Fair costs for all

ETFs are designed so that the costs associated with trading are borne only by the investor who is buying or selling those ETF shares. If new ETF shares are created, this can happen “in-kind”, which means a basket of underlying securities, such as bonds, is delivered directly to the ETF by an authorised participant (AP), in return for new ETF shares. Similarly, when ETF shares are redeemed, the AP delivers ETF shares to the ETF in return for a basket of securities. If cash is delivered instead of securities, a fee is applied by the ETF to the AP, who in turn passes it on to the investor to cover the cost of purchasing new securities, or for selling the necessary securities.
 

This open-ended structure means that the ETF’s manager doesn’t have to trade securities to meet underlying demand for shares, and the ETF’s net asset value (NAV) is not diluted by trading activity. Instead, the costs of entering or exiting an ETF are paid solely by the investor transacting, rather than being shared across all shareholders.
 

Active ETF managers can also use the in-kind creation and redemption process to manage portfolio turnover strategically, allowing them to add or subtract securities to an ETF only when it aligns with the manager’s strategy, and without incurring trading costs in the open market. The performance of active fixed income ETFs will therefore reflect the active decisions of the ETF’s portfolio manager, rather than being diluted by the cash flows of other shareholders.

Reducing transaction costs within fixed income ETFs

Keep more of what you earn

ETFs can reduce the total cost of owning fixed income exposure, starting with execution. Trading individual bonds can be operationally expensive and inefficient, with wide bid–ask spreads and limited price transparency. By pooling demand on exchange, ETFs often trade at much tighter spreads, helping active fixed income managers implement their investment strategy at lower cost.

The structural costs of ETF ownership are also typically low. ETFs generally carry low expense ratios, meaning less of a portfolio’s income is paid away in fees. Over time, even small differences in annual charges compound, leaving a larger share of returns in the hands of investors.
 

ETF investors retain more of the return generated by the portfolio, while active managers can focus on delivering excess return without costs diminishing the benefit of their positioning. The results are clear: looking at global aggregate bond ETFs, we can see that active managers have produced consistent average excess annualised returns compared to the Bloomberg Global Aggregate Index, and have significantly outperformed their passive peers over time, net of fees.

Active fixed income managers outperform their passive peers

Average excess annualized returns over the Bloomberg Global Aggregate Bond Index

Source: Morningstar, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. This information is for illustrative purposes only, does not reflect actual investment results, is not a guarantee of future results and is not a recommendation to buy or sell. The chart above reflects performance of all funds managed against Bloomberg Global Aggregate Index (LEGATRUU/LEGATRUH). Data as of 30 September 2025. The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from a multitude local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

Liquidity when it matters most

Liquidity in bond markets can weaken significantly in periods of market stress. Active fixed income ETFs mitigate this issue by providing two important additional layers of liquidity. In the secondary market, where most trades occur, investors can trade ETF shares throughout the day at live, transparent prices. In the primary market, authorised participants can create or redeem shares to meet demand, adding another layer of liquidity.
 

This structure has repeatedly proved its worth in recent years. During the inflation-driven bond market volatility of 2022 and 2023, for example, high-yield ETFs accounted for less than 10% of the bond market’s assets, yet their secondary market trading made up nearly half of all trading in the US high-yield bond market.
 

In other words, investors often chose the ETF as the easier and more efficient wrapper for high yield bond transactions than the bonds themselves.
 

Fixed income ETFs can concentrate and release liquidity at times when the bond market itself is harder to access. Because ETF portfolios can be adjusted by accessing the secondary market, an active ETF manager doesn’t need to buy or sell underlying bonds in the primary market. Active ETF managers can therefore avoid unnecessary turnover in the primary market and benefit from resilient trading of ETF shares, even during times of elevated market stress.

U.S. high yield ETF trading volume in periods of market stress

Share (%) of 20-day rolling average trading volume of overall high yield bond market

Price discovery in real time

Because ETFs trade continuously throughout the trading day, their market prices serve as a live signal of where bonds are valued. This real-time price discovery can be a valuable input for navigating volatility and identifying opportunities, and provides greater clarity in assessing live market conditions, particularly in less liquid sectors.

During the COVID-19 turmoil, for example, a Bank for International Settlements study found that ETF prices responded more quickly and precisely to new information than NAVs. Market pricing is often the most accurate reflection of value, even if an ETF’s price appears as a premium or discount, typically because the NAV is stale or lagging.

The ability to observe real-time prices gives investors a timelier, more accurate read on bond values. For active managers, it provides clearer signals of when and where to act.

Investment grade bond ETF average price and average NAV during COVID-19 pandemic

Know what you own

Transparency and accessibility are two of the clearest benefits of the ETF wrapper. As most ETFs publish their portfolios daily, investors can see exactly what they own, understand which positions are driving returns, and gain confidence in how their money is being managed. It also makes performance attribution easier, helping clients connect outcomes to portfolio decisions in real time.

Accessibility is just as important. With no high minimum investments – just a brokerage account and the price of a single share – ETFs open professionally managed active fixed income strategies to a far wider audience. A single ETF share provides exposure to a portfolio run by experienced bond managers.

ETF investors gain visibility and access to markets that were once reserved for institutions, while active managers demonstrate accountability every day through their positioning and results.

ETF transparency allows investors to know what they own

Active ETFs: Fixed income at its fullest

After one of the sharpest tightening cycles in decades, interest rates are stabilising. But the path ahead is uncertain. Yield curves are distorted, credit risks are diverging, and liquidity conditions can quickly shift.
 

This is exactly when active bond managers can add value: adjusting exposures, seeking overlooked opportunities, and managing risks with greater flexibility than passive vehicles. The ETF wrapper amplifies those active advantages by allocating costs fairly, reducing expenses, providing resilient liquidity, and by delivering real-time price signals and daily transparency.
 

Active fixed income ETFs package up active judgement in a highly efficient, transparent way, helping investors go beyond benchmarks, preserve more return, and position portfolios for whatever comes next.
 

The message is clear: fixed income works harder with active ETFs.