The fixed income environment continues to project uncertainty, as higher-for-longer interest rates persist amid sticky inflation. With that, investors may want to lean on the expertise of active managers when deciding between an active and indexed fund.
In a recent webinar entitled A Fresh Look at Fixed Income, Roxana Islam (head of sector & industry research at TMX VettaFi) moderated a panel that featured Justin Danfield (Vice President and ETF Strategist at Fidelity Investments) and Elise Randazzo (Institutional Portfolio Manager at Fidelity Investments) to outline today’s complex credit markets. As mentioned, it’s an environment that certainly warrants an active approach.
The Passive AGG Trap
As outlined in the webinar, the advent of the ETF brings advantages to the fixed income market, like intra-day flexibility, diversification, tax efficiency, transparency, and low cost. Danfield pointed out another advantage, “the fixed income ETF’s ability to be a price discovery tool,” which is beneficial in choppy markets.
For years, investors defaulted to the Bloomberg U.S. Aggregate Bond Index (AGG) as their core fixed income baseline. However, Randazzo exposed a fundamental flaw inherent to fixed income indexing rules.
“The largest borrowers get the biggest weight, and so the more debt an issuer has outstanding, the larger that representation is of the index regardless of underlying fundamentals,” Randazzo cautioned.
See More: Fidelity’s Thorpe Talks Yield, 2026 Outlook
Summarily, this means the largest borrowers and most heavily indebted receive the highest index weights. Over the past decade, this concentration risk has accelerated dramatically under heavy government issuance.
“Treasuries alone now represent a much larger share of the Index than they did just a few decades ago,” Randazzo noted. He added that “Leading into the global financial crisis in 2008, Treasuries were about 25% of the AGG. Today they’re nearly 50%.”
Furthermore, anchoring a portfolio strictly to the AGG leaves nearly half of the domestic bond market untouched. This is where investors could be missing out on potential opportunities.
“The AGG, at about $31 trillion in market cap, represents just under half of the total U.S. bond market,” Randazzo explained. That means passive allocators automatically miss out on vital asset classes like high-yield, loans, emerging market debt and Collateralized Loan Obligations (CLOs).
Attractive Yields, Selective Opportunities
The current market environment is characterized by a divergence between attractive absolute yields and tight credit spreads. While yields remain toward the higher end of their 20-year range, spreads are near cyclical tights, reflecting both a strong technical and fundamental backdrop. From a technical perspective, issuance has been elevated, particularly from hyperscalers funding AI-related investment, but demand has been exceptionally strong, with deals consistently oversubscribed.
That strength in demand is being supported by several structural forces, including price-insensitive buyers, yield-oriented investors given attractive all-in yields, and flows from passively managed solutions. “For credit investors, however, spreads at these levels creates an asymmetric return profile, where the downside risk from potential spread widening can outweigh the limited upside from further compression." Randazzo explained.
In this environment, broad passive allocations face structural risks. Conversely, an active manager can uncover pockets of idiosyncratic and out-of-benchmark opportunities where more attractive risk-reward can be found.
Active Research Rigor
Given the complexity of the bond market and the breadth of opportunities available, this is where an active, research-driven approach becomes essential. Fidelity deploys a comprehensive research model that is fully integrated across asset classes with the goal of generating differentiated insights that directly inform investment decisions. Leveraging the size and scale of their equity and fixed income platforms, analysts conduct thousands of company meetings annually.
“Our equity and credit analysts often meet with management teams together, allowing us to build a comprehensive, multi-dimensional view of each and every issuer,” Randazzo explained. “This integrated approach enables us to develop a full mosaic of every name, combining fundamental insights with broader macro context to drive more informed portfolio decisions.”
To tap into Fidelity’s active management prowess and capture these opportunities in fixed income, consider the Fidelity Total Bond ETF (FBND ). Operating with an unconstrained core-plus mandate, FBND maintains a high-quality foundation while deploying up to 20% of its capital into tactical “plus sectors” like high-yield, loans, and non-benchmark structured credit.
To watch the webinar in its entirety, click here.
For more news, information, and analysis, visit the ETF Investing Content Hub.
Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
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