Defense, Yield, or Both? An Active Bond ETF for Any Market

The benefits of active management strategies are imperative, especially in today’s bond market environment. Geopolitical tensions and tariffs have been inducing volatility in the markets. That requires the need for bond exposure to offset the market fluctuations. The tilt toward a more defensive stance versus an income-seeking stance is becoming more apparent.

“In a market increasingly defined by contradiction – cooling growth but sticky inflation, elevated rates but looming recession risk – fixed income strategy is shifting from yield chasing to risk calibration,” a Benefits and Pensions Monitor said, summing up the uncertainty surrounding the bond markets.

As Benefits and Pensions Monitor noted, a risk-off stance has been the prevailing sentiment with a switch from cyclical sectors to more stable ones like utilities. The equity market has largely recovered from the tariff-fueled sell-offs in April. But cautious optimism is still necessary. That’s also the case with bonds, which experienced their own share of volatile moments this year. It’s just another reason an active approach would suit the current market environment well.

In addition to being a ballast for equities portfolios, fixed income investors also want yield. With interest rates elevated, that could all change once the Federal Reserve pivots from keeping rates steady when economic data warrants a cut. When that happens, fixed income investors may need the help of active management strategies to help sustain that level of income they’ve been accustomed to in this higher-for-longer inflation environment.

“Unlike the post-2008 period, we’re now in a world where fixed income offers attractive levels of income,” said Hafiz Noordin, vice president & director, Active Fixed Income Portfolio Management at TDAM. “And income stability will be increasingly important in managing through uncertainty.”

True to its name, VPLS gets to the core of bond exposure. With that, diversification is key. That’s because the fund includes holdings in U.S. Treasury, mortgage-backed, and corporate securities, and emerging markets debt of varying yields, maturities, and credit qualities. It does all of this with a low expense ratio of 0.20%, which is below the FactSet segment average of 0.33%.

When you consider the deep well of experience and market talent of the Vanguard Fixed Income Group, it only makes VPLS that more compelling. Active management strategies have been seeing greater demand in recent years. This is especially the case when it comes to fixed income exposure. The Fixed Income Group can adjust the holdings of VPLS when market conditions necessitate changes to get more defensive or extract more yield. Speaking to the latter, the fund has a 30-day SEC yield of 4.80%, as of June 18.

The active management also speaks more to the flexibility of the fund. Increased market volatility can allow VPLS to become more defensive, or search for higher yield opportunities if interest rates fall in the short- to long-term horizon. As such, VPLS presents itself as an option to a passive fund.

If cost continues to remain a concern, then core exposure can be had via the Vanguard Total Bond Market Index Fund ETF Shares (BND A). The fund presents a simple, and even more cost-effective (0.03% expense ratio), approach to bond exposure. Investors will have to sacrifice yield to get this lower expense ratio, as its 30-day SEC yield is 4.45%.

Whether it’s via active exposure to VPLS or passive exposure via BND, each fund offers investors a simple solution to create the 40% bond allocation in a 60/40 portfolio. As opposed to creating a bond portfolio comprising individual debt issues, both funds provide all-inclusive options in the bond market at a low cost in the convenience of an ETF wrapper.

For more news, information, and analysis, visit the Fixed Income Channel.