Interest in active fixed income products has swelled in 2024, as credit spreads narrow and the Federal Reserve holds fast to a “will they, won’t they” game of trimming interest rates. Active fixed income ETFs have seen north of $11 billion in net inflows this year and $27 billion globally.
Right now, the bond market is perfectly poised for expansion among actively managed ETFs. Advisors are seeking out sharper tools to fine-tune credit quality, duration risk, and exposure on a more granular level. Their hope is to generate incremental income and build a ballast for their overall portfolio.
Even so, there’s still a huge untapped market for issuers. A recent Capital Group survey noted that less than 4% of all managed assets are parked in active fixed income ETFs, and only 12% of fixed income ETF assets are active.
The trend towards active fixed income is not only about converting more mutual funds into ETFs. It is also about leveraging ETFs to showcase their fixed income capabilities in an active wrapper. It offers a chance for the largest funds to bring their best and brightest managers into the ETF world.
Bringing in the A-Team
BlackRock, Vanguard and State Street Global Advisors have all become key players in the active fixed income ETF space.
Vanguard launched a pair of active bond ETFs late last year – the Vanguard Core Bond ETF (VCRB ) and the Vanguard Core Plus Bond ETF (VPLS ), which primarily invest in U.S. investment-grade products. The Vanguard Ultra-Short Bond ETF (VUSB ) has also been around for several years, and all three ETFs have enjoyed modest inflows in 2024.
Vanguard is no stranger to the active space. In fact, roughly 20% of Vanguard’s business is in those funds.
On a recent VettaFi webcast, John Croke, Head of Active Fixed Income Product Management at Vanguard, said the debate over active versus passive strategies needed a refresh. More advisors are finding ways to allow both strategies to peacefully coexist.
“The trend we’re seeing is active and passive,” he said. “We’re seeing active in the core and index in the satellites – with the strongest flows in active going into core, core plus and multi-sector strategies that span multiple sectors of the fixed income markets.”
Croke also underscored the importance of his firm’s foray into the active bond ETF space. “I believe active fixed income at Vanguard is the most powerful manifestation of what Jack Bogle developed 48 years ago,” he said.
On that same webcast, we asked advisors what their preferred vehicles were for building bond portfolios. Nearly a third of them said active ETFs and funds – while only 15% said index-based ETFs and funds. Meanwhile, 42% of respondents said they use a combination of methods – including bond ladders and/or separately managed accounts.
Strong Starts in Active Funds
The BlackRock Flexible Income ETF (BINC ), which just celebrated its one-year anniversary, is off to a stellar start – growing to $3 billion in assets and seeing $2.5 billion in net inflows this year. The fund is run by Rick Rieder, CIO of Global Fixed Income. Rieder earned Morningstar’s Outstanding Portfolio Manager award last year. BINC offers a flexible, multi-sector approach that provides high-yield fixed income exposure on a global scale. Additionally, it provides access to above- and below-investment grade debt.
State Street Global Advisors has seen great success with its SPDR Blackstone Senior Loan ETF (SRLN ), which has seen $1.2 billion in net inflows this year. But they’ve also branched further out into the active bond ETF arena – launching the SPDR Loomis Sayles Opportunistic Bond ETF (OBND ) in 2021. The fund tracks everything from blue-chip bonds to leveraged loans.
Setting the Stage for New Entrants
Even lesser-known ETF entrants who have just recently gotten into the ETF game are seeing early success.
AllianceBernstein’s AB Ultra Short Income ETF (YEAR ) just hit the $1 billion milestone in total assets. YEAR, which charges 0.2%%, primarily offers investment-grade instruments with a duration of less than one year.
Capital Group has also seen solid net inflows into its Capital Group Core Plus Income ETF (CGCP ) and Capital Group Core Bond ETF (CGCB ), which just doubled in size this week – growing to $533 million in assets under management.
Active bond funds have historically outperformed passive bond funds since 2022. This has prompted advisors to pivot to high-quality active ETFs for their clients. We are confident the trend will continue to gain traction.
For more information, please visit VettaFi.com | ETF Trends.
