Do Active Bond ETF Managers Add Value?

June 26, 2018

[This article appears in our July 2018 issue of ETF Report.]

There are only 225 actively managed funds in a universe of more than 2,100 U.S.-listed ETFs. Not only are more than 80 of those active ETFs classified as fixed-income products, all but two of the top 10 actively managed fixed-income ETFs in terms of assets cover the fixed-income space. Active management is a popular approach when it comes to fixed income, and much of that may have to do with a record of superior performance.

Although research, such as the S&P Indices Vs. Active (SPIVA) report, indicates that most of the time the indexes beat the active managers, that’s not always true. A 2017 research paper from Fidelity Investments using Morningstar data showed that 86% of short-term, 90% of intermediate-term and 94% of multisector actively managed funds beat benchmarks after expenses on a one-year time frame. Over a three-year time frame, the percentages that outperformed benchmarks were 65%, 55% and 65%, respectively. Even on a five-year time frame, well over half of these funds outperformed.

If a fund uses the Bloomberg Barclays US Aggregate Bond Index, such as represented by the iShares Core U.S. Aggregate Bond ETF (AGG), “it’s kind of a low hurdle” to cross, says Ben Johnson, director of global ETF research at Morningstar.

Some of the biggest actively managed ETFs by assets under management (AUM) generally match or beat AGG on a year-to-date basis, including the PIMCO Active Bond ETF (BOND), the SPDR DoubleLine Total Return Tactical ETF (TOTL), the PIMCO Enhanced Short Maturity Active ETF (MINT) and the First Trust Low Duration Opportunities ETF (LMBS).

And some of the harder-to-categorize funds—like senior loan funds such as the First Trust Senior Loan Fund (FTSL) and the SPDR Blackstone / GSO Senior Loan ETF (SRLN)—are also outperforming AGG.

Even in sectors like high yield or corporate bonds, many active funds beat other passive ETFs often used as benchmarks.

For instance, the Advisor-Shares Peritus High Yield ETF (HYLD) is handily beating the iShares iBoxx USD High Yield Corporate Bond ETF (HYG) year-to-date and on a 12-month basis after fees (although HYG outperforms on a three-year basis after fees). In the corporate bond space, the iShares Interest Rate Hedged Corporate Bond ETF (LQDH) significantly outperforms the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) after fees on a year-to-date, one-year and three-year time frame. However, LQDH is basically an investment in LQD paired with an actively managed hedge, so its outperformance may be more a function of its hedging ability during a period of rising interest rates.



Some Passive Bond ETFs Thriving
Of course, some passive funds are doing well. Take the SPDR Bloomberg Barclays Convertible Securities ETF (CWB), which has one of the best track records of any fixed-income fund on a year-to-date, one-year and three-year time frame.

Eric Mogelof, managing director and head of U.S. global wealth management at PIMCO—which offers only actively managed fixed-income ETFs—says the large number of noneconomic bond buyers like central banks or insurance companies that aren’t necessarily looking to maximize returns creates inefficiencies, allowing active managers to generate excess returns.

Further, he says, supplies of a particular bond are determined by how much the borrower needs to borrow. A company or a country may need to borrow a lot of money, but it may not make sense for the buyer. “In a typical passive strategy, you’d own more of that bond, but from a credit perspective, that may not actually be the best choice,” Mogelof said.

Ryan Issakainen, senior vice president and ETF strategist at First Trust—which offers only actively managed fixed-income ETFs—concurs, especially when it comes to below investment grade. Credit indexes are flawed from an investment standpoint, he notes: “Why would you want to weight an index to the companies that are least likely to service and repay you? ... Managing that downside risk is extremely important.”

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