Fixed income ETFs have experienced tremendous growth in assets and active fixed income ETFs are becoming an important tool for investors to source returns in an increasingly complex market environment.

Fixed income investors can benefit from active strategies

Many investors have viewed fixed income portfolios as good candidates for passive ETFs, which can provide core fixed income exposure, such as a diversified bond index, at minimal cost.

But passive ETFs may not always create the outcomes investors expect from their fixed income allocations, including diversification and potential return enhancement. In fact, while passive investments leave investors vulnerable to the changing investment characteristics of fixed income indices and market behavior, active ETFs have the opportunity to benefit from these events.

For example, unlike equity indices, the composition of bond indices is driven by the largest issuers, not necessarily the most “successful” issuers. This means a passive ETF will automatically drift towards the largest issuers over time irrespective of the quality of their balance sheets. An actively managed fixed income ETF can allocate towards higher-quality issuers and away from those that could be at risk for downgrades, which can help preserve capital and returns in time of economic or market stress.

Active fixed income ETFs can also capitalise on numerous factors that impact bond prices and move markets, including economic and market cycles, central bank actions and regulations for institutional investors. For instance, an active strategy can adjust interest rate exposure and sector allocation through the cycle, enabling investors to own cheaper securities and underweight expensive ones while maintaining a stable bond beta.

Active ETFs can offer extra benefits

The unique mechanics of active ETFs are transforming the delivery of active fixed income strategies, with multiple benefits for investors. To begin with, active ETFs offer daily transparency into fund portfolios vs. monthly or quarterly for mutual funds and they tend to have much lower management fees.

Active ETFs are also highly liquid: They have the same primary market mechanism as passive ETFs and they trade on the same stock exchanges in the secondary market, which allows investors to buy and sell throughout the day providing real-time price discovery. This not only improves liquidity but allows investors to monitor the values of their active portfolios more closely, a material benefit in times of market stress.

Explore the global opportunity with J.P. Morgan Asset Management’s Global Aggregate strategy

Some fixed income strategies are particularly well suited to active ETFs. The Bloomberg Global Aggregate Index is a core allocation that covers a wide opportunity set spanning government, corporate, government-related, emerging market and securitized bonds across 25 local currency markets. The size and complexity of the Global Aggregate universe makes a compelling case for active management that employs bottom-up security selection and top-down sector allocation, while taking advantage of relative value opportunities by rotating between sectors.

Our Global Aggregate strategy’s time-tested process has delivered strong returns since inception of the strategy in 2009 while retaining the key features of a core bond portfolio, including low volatility, limited drawdowns and no market bias.

  1. Low volatility: With an experienced team of investors and a disciplined portfolio construction process, J.P. Morgan Asset Management’s actively managed Global Aggregate investment strategy has delivered strong returns over the 5 rolling years compared to the Global Aggregate index with similar volatility.

2. Strong returns: Our active strategy, featuring a diversified investment process whilst seeking to generate excess returns from many different sources, not just from a few big positions, as such it has delivered strong excess returns over time.

3. Limited drawdowns: The risk management process includes stress testing and makes the portfolio managers vigilant against unexpected risks. Over a period with many different and unexpected real stress tests – from the eurozone sovereign crisis to Covid – our strong focus on risk management has helped limit performance drawdowns vs. the J.P Morgan aggregate strategy benchmark.

4. No market bias: Funds delivering superior returns by overweighting higher-yielding risk assets typically underperform when the bond market rallies in a risk-off environment. Our disciplined Global Aggregate investment process avoids this market bias and has outperformed in both rising and falling markets, allowing investors to rely on the strategy as a core bond offering that can help hedge riskier assets.

Fixed income ETFs powered by active research

As the current interest rate-hiking cycle plays out across regions, liquid, low-cost active fixed income ETFs can offer investors an efficient way to take advantage of this dynamic environment. For instance our JPM Active Global Aggregate Bond UCITS ETF* (JAGG) provides access to the diversification of the global bond universe with the benefits of our active investment strategy.