4 ETF Bond Managers Share Their Top Picks

July 17, 2017

What to do about a fixed-income allocation remains a lingering question for many investors.

On one side, the 30-plus-year bond rally is said to be over, and the outlook for returns in bonds is on the decline. On the other hand, Treasury yields continue to drop even as the Federal Reserve remains committed to pushing rates higher (yields drop when bond prices rise). So far this year, 10-year Treasury yields have slipped 5.3%.

So what’s an investor to do? Baby boomers retiring en masse will continue to need income; foreign investors will continue to look to the relative appeal of U.S. yields over their own; and the need for diversification, for de-risking portfolios and for preservation of capital isn’t going anywhere. All these trends will keep the bond market underpinned, bond managers say.

But consider broad fixed-income returns based on the Bloomberg Barclays Aggregate Bond Index (the Agg), in the past several years, as illustrated below. The trend is clearly downward: 

 

Sources: Morningstar, Bloomberg

 

The Agg is one of the most widely used bond benchmarks in the fixed-income space, anchoring the largest bond ETF in the market today, the iShares Core U.S. Aggregate Bond ETF (AGG), with $48 billion in assets.

Active managers have been looking beyond the Agg benchmark in search of higher returns to meet investors’ income needs. Here’s how the price performance of the four most popular total bond ETFs stack up this year relative to iShares’ AGG. They include:

 

Source: StockCharts.com 

 

For the most part, on a price return perspective, they are all outpacing AGG, with FBND the laggard of the group this year. (Last year, FBND was the top performer.)

The active managers behind these ETFs tell us their best ideas—where they are finding alpha these days, and what parts of the fixed-income market they are avoiding.

 

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