Active bond funds are having a strong year, according to data from "Morningstar.":https://www.barrons.com/market-data/stocks/morn?mod=article_chiclet If the trend persists, Vanguard has a pair of options to consider if fixed income investors want to get more active with their core bond exposure.
“More than two out of three active bond funds beat comparable index funds for the 12 months ending in June, according to a Morningstar report,” Barron’s noted, adding that funds focusing on intermediate bonds in particular “performed even better with 73% beating their index-tracking rivals—the highest success rate in any fund category Morningstar studied.”
Given the recent market volatility, investors have been piling into bonds in a safe haven scramble, but also due to the expectation of falling interest rates. Additionally, investors are looking to lock in yields now before they subsequently fall after easing monetary policy.
“Actively managed funds in the intermediate core bond category tend to court more credit risk and sport shorter durations than index offerings,” Morningstar added. “That posture was ideal during the year ended June 2024 as credit spreads narrowed and persistent inflation pushed back the timeline for interest-rate cuts.”
2 Active Options from Vanguard
Two options to consider include the Vanguard Core Bond ETF (VCRB ) and the Vanguard Core-Plus Bond ETF (VPLS ). Investors shouldn’t worry about high expense ratios typically associated with active funds, as these two carry 0.10% and 0.20% expense ratios, respectively.
Active management allows portfolio managers to adjust holdings based on current market conditions. With an impending presidential election, more volatility could be ahead, giving active management a degree of flexibility that’s not inherent in passive funds.
To mitigate credit risk, VCRB focuses on the U.S. investment-grade bond market. In addition to U.S. Treasuries, the fund extends its exposure to other fixed income assets for diversification, which includes mortgage-backed and corporate securities. This allows the fund to extract more yield opportunities for income diversification.
Speaking of yield, it has been one of the prime motivators for obtaining bond exposure. And fixed income investors looking to maintain yield will want to consider VPLS. The fund adds exposure to riskier credit profiles such as emerging market debt. But like VCRB, its active strategy can help temper risk.
Both funds allow investors to harness the deep well of talent from the Vanguard Fixed Income Group. The bond market has its own set of intricacies, and having a portfolio management team that can navigate through the complexities is beneficial.
For more news, information, and analysis, visit the Fixed Income Channel.
