A few factors have pushed up the demand for active fixed income ETFs. For one thing, after being in a zero-interest-rate environment for more than a decade, rates are up, thanks to the Fed’s quantitative tightening.
Plus, the desire for income has grown in recent years. According to Morningstar’s Daniel Sotiroff, “Dividend funds are very popular, and fixed income for a long time before you got into the zero interest-rate environment fulfilled some of that.”
During VettaFi’s Income Strategy Symposium in October, Vanguard’s Senior Fixed Income Specialist Dan Larkin said he’s seen “a greater preference for active management in fixed income.” He added that there has been growing adoption of the ETF vehicle among investors.
So, higher rates and a growing appetite for income have led to an increased demand for active fixed income ETFs. Amid this upped interest in active management, Vanguard in 2023 launched two new actively managed bond ETFs.
Providing Investment-Grade Exposure (While Dipping Into High Yield)
The Vanguard Core Bond ETF (VCRB ) seeks to provide broadly diversified exposure predominantly to the U.S. investment-grade bond market. It invests in fixed income securities of various maturities, yields, and qualities. It may invest up to 5% of its assets in non-investment-grade fixed income securities, aka “junk bonds.” This includes allocations to such sectors as U.S. high yield corporates and emerging markets debt.
VCRB carries an expense ratio of 0.10%.
The Vanguard Core Plus Bond ETF (VPLS ), meanwhile, also offers exposure primarily to U.S. investment-grade securities. Like VCRB, VPLS can allocate to sectors beyond the U.S. investment-grade bond market. However, VPLS can allocate more to riskier sectors (up to 35% of its assets).
VPLS charges 20 basis points.
These two active bond ETFs offer clients broadly diversified fixed income exposure with low equity correlation. They also offer the potential to outperform broad bond benchmarks over the long term. Daniel Shaykevich, Brian Quigley, Arvind Narayanan, and Michael Chang manage both ETFs.
Sotiroff explained that Vanguard’s funds “tend to be very low fee…and because of that, they don’t have to take on a ton of risk in order to outperform.”
“So, you get a little bit more of a conservative portfolio,” he added. “But the potential for outperformance is still there because they’re relying on that low fee as really the catalyst to actually drive the performance.”
For more news, information, and analysis, visit the Fixed Income Channel.