Why 2024 Is the Year of Active Fixed Income ETFs

2024 has marked a shift for fixed-income investors, with active fixed-income ETFs emerging as a top choice for those navigating an uncertain economic landscape. 

Fixed-income funds like the JPMorgan Ultra-Short Income ETF (JPST) and the Fidelity Total Bond ETF (FBND) are among the largest actively managed ETFs on the market with assets rivaling heavyweights like the JPMorgan Equity Premium Income ETF (JEPI) and the Dimensional U.S. Core Equity 2 ETF (DFAC). 

Active fixed-income funds offer a more nuanced approach to bond markets than traditional, passive bond funds, drawing attention as investing preferences evolve and a range of economic headwinds—including persistent inflation and a slowing economy—loom on the horizon. 

Rising Interest in Active Management

A primary driver behind the popularity of active fixed-income ETFs is the fluctuating interest rate environment. Following a prolonged period of rate hikes by the Federal Reserve, yields on bonds have become more attractive. However, the future path of rates is uncertain as president-elect Donald Trump’s tax and tariff policies have reawakened inflation fears. 

Actively managed ETFs allow portfolio managers to pivot quickly, taking advantage of opportunities and minimizing risks by adjusting allocations, durations, and credit quality within the portfolio. 

Active ETFs Offer Flexibility Amid Economic Uncertainty

Active fixed-income ETFs provide flexibility that passive options can’t match. With the potential for a recession, ongoing inflation concerns, and geopolitical uncertainties, many investors prefer funds that can dynamically adjust based on economic conditions.  

Actively managed funds employ strategies like duration hedging and credit selection, which potentially mitigate risks and seize opportunities unavailable to passive funds. For example, some active managers are reducing duration to mitigate a “higher-for-longer" rate environment or selectively adding high-yield bonds to capture elevated yields where they see potential for stable cash flows. 

Diversified Offerings in Niche Bond Markets

Beyond traditional bonds, active fixed-income ETFs often include niche sectors like high-yield bonds, municipal bonds, and emerging-market debt. These segments can provide higher yields and diversification benefits, which have been particularly appealing in a year where fixed-income yields are comparatively high. 

Actively managed ETFs are also able to capitalize on mispricing in less-liquid segments, such as municipal or corporate bonds, which passive funds sometimes avoid due to tracking constraints. 

Performance and Cost Considerations

While actively managed ETFs tend to come with higher expense ratios than passive ETFs, their performance in 2024 has justified the cost for many investors. With inflation and interest rate changes impacting bond prices, actively managed funds have been able to outperform by adjusting holdings in ways that passive strategies cannot. 

For example, for the year ending Nov. 8, Fidelity’s FBND produced a total return of more than 9% while the largest passively managed bond ETF, the iShares Core US Aggregate Bond ETF (AGG), returned just over 8%. 

Many investors consider the slightly higher expense worth it for the opportunity to outperform traditional bond indices. 

Bottom Line on Active Fixed Income in 2024

In a year characterized by complex financial challenges, active fixed-income ETFs have become a favored vehicle for investors seeking both resilience and adaptability. As 2024 winds to a close and 2025 arrives, the demand for actively managed ETFs may continue with the desire for more targeted bond market exposure, enhanced returns, and flexible strategies to navigate economic uncertainty.  

With attractive yields and a strong outlook for tailored management, actively managed bond ETFs are likely to remain a major player in fixed-income investing.