How To Outperform The Barclays Agg

November 18, 2016

There are four actively managed total return bond ETFs on the market today, each seeking to outperform the Bloomberg Barclays US Agg, iShares Core U.S. Aggregate Bond ETF (AGG), while offering investors a nimble, tactical approach to fixed-income investing.

The funds, which include the SPDR DoubleLine Total Return Tactical ETF (TOTL), the PIMCO Total Return Active ETF (BOND), the Guggenheim Total Return Bond ETF (GTO) and the Fidelity Total Bond ETF (FBND), command a combined $5.6 billion in assets. This year, the most impressive performance among them is in FBND, which happens to be one of the smaller of these funds, with $208 million in assets. 


Chart courtesy of


Ford O’Neil manages FBND as well as Fidelity’s mutual fund version of this strategy, and he tell us what has worked thus far this year, as well as what’s changed following the outcome of the presidential election. Fixed-income ETFs have been hugely popular this year. As of the end of October, U.S. fixed-income ETFs had more than $71 billion in net creations in 2016, not only more than U.S. equity ETFs have gathered this year, but about 40% of all ETF asset flows we've seen year-to-date. What's been driving this surge in demand for fixed-income exposure?

Ford O'Neil: One thing we've seen since the global financial crisis is people better understanding the value of having fixed income in their overall portfolios. It sometimes takes an equity market drop of over 20 or 30% to remind people why they need fixed income.

Income's an important component here. When money market funds and bank CDs are earning next to nothing, that’s critical. Preservation of capital's also important, and there's much better preservation of capital in fixed income relative to other more volatile securities. Lastly, there are the benefits of diversification. Broadly speaking, that’s why fixed income has done well.

The other key big secular theme is demographic trends. As baby boomers continue to retire, they're slowly shifting from equities to fixed income. That, from our perspective, will be impacting fixed-income flows for years to come. From a performance perspective, though, November hasn’t been easy. Is there an election-related unwinding of the massive run-in to things like AGG, LQD (iShares iBoxx $ Investment Grade Corporate Bond ETF) and TLT (iShares 20+ Year Treasury Bond ETF), or is there something else at play here?

O'Neil: Longer-term bond returns have been in the mid- to high-single-digits for several years now. And we've been cautioning clients in the last few years that their expectations for returns should be much more modest: low- to mid-single digits, at best. That's important, and remains unchanged.

Now there's always a certain level of uncertainty in any market, and that’s increased in the past two weeks. Most expected a divided House/Senate/White House, and eight more years of gridlock.

The two tail events that existed were a Democratic sweep or a Republican sweep, the latter being the one offering the highest level of uncertainty today. But markets at this point are speculating on what might occur over the next four years—there are few facts to go on.

When we think about investing, we think about bonds and securities with a time horizon of one to two years, on average. So it's much harder for us to speculate on what's driving markets week to week.


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