Ryan Szakacs
Managing Director
Published:
Active management in fixed income ETFs offers flexibility, accessing market segments and potentially delivering higher yields.
The fixed income market is evolving, driven by the increasing adoption of exchange-traded funds (ETFs). Actively managed fixed income ETFs are gaining momentum, offering portfolio managers the flexibility to navigate market complexities and access segments often inaccessible through passive indices. We anticipate the global fixed income ETF market could grow to $7 trillion by 2030, with active strategies capturing a significant portion of this growth. This report explores how combining active management with the ETF structure creates compelling investment approaches. See how we can help you capture yield and diversification.
Active Management is Essential for Fixed Income
The global fixed income market is vast—about $145 trillion, encompassing over 3 million unique securities. This complexity, coupled with structural inefficiencies, demands active oversight. Passive strategies must absorb challenges like interest rate sensitivity and credit risk. Active managers, however, possess the freedom to navigate these factors, leveraging fundamental, quantitative, and technical analysis. This approach has proven effective, with 80% of core and core plus managers outperforming the Bloomberg U.S. Aggregate Index over the past five years.
ETFs Enhance Fixed Income Liquidity and Efficiency
The ETF structure represents a consequential development for fixed income investing, providing a liquid vehicle in a market often known for illiquidity. ETFs trade on exchanges, offering readily available prices throughout the day. Furthermore, the structure offers cost and tax efficiencies that mutual funds may lack. For instance, transaction costs are borne by the individual investor, insulating the fund’s net asset value. Together, these structural benefits position ETFs as a modern approach to accessing bond markets.
Active Fixed Income ETFs Offer Flexibility and Opportunity
Active fixed income ETFs are shaping the next wave of industry growth. Without the constraint of replicating an index, active managers gain the flexibility to tailor and optimize investments. This is particularly important in today’s higher interest rate environment. Active strategies allow managers to invest in a more expansive universe, finding meaningful yield in corners of the market—such as securitized and high yield debt—that are not accessible to everyday investors or passive indices.
Expanded Opportunity Sets Drive Diversification
Fixed income benchmarks often fail to represent the full market. The Bloomberg U.S. Aggregate Index excludes about 49% of the U.S. public bond market. Active managers address this challenge by investing in an expanded universe, including securitized credit and municipal bonds, which offer material spread advantages and diversification potential. We concentrate on leveraging deep credit research and flexible positioning to navigate market fragmentation and uncover overlooked areas for enhanced yield potential.
The convergence of active management and the ETF structure marks a significant advancement in fixed income investing. We see that active strategies are uniquely positioned to navigate the complexities of the bond market, offering the flexibility to seek higher yields and manage risk effectively. The ETF wrapper provides essential benefits like enhanced liquidity, price discovery, and tax efficiency. As investors adjust allocations in response to changing rates, active fixed income ETFs emerge as a valuable tool for building resilient portfolios. Let’s solve it together—download the full report to explore our insights on this evolving market.