Friday’s rip-roaring jobs report has pushed the betting markets to price in a single rate cut for the entire year of 2025. Many top Wall Street brokerages have now revised their rate forecasts. BofA Global Research is even saying the rate-cutting cycle is over and the next move could be a rate hike. Despite both a tamer PPI and CPI print this week, fears over stickier inflation remain very real.
In the blink of an eye, a rate cut once expected to recur on a monthly or quarterly basis has now dropped to annually. As uncertainty around fiscal and trade policy abounds, the risk-reward profile on equities has become less favorable. And on the fixed income front, the Street is forecasting returns similar to those of last year; thus, they need to work harder to extract returns. However, bonds offer stability and high real yield.
Renewed Emphasis in 2025
In a recent 2025 outlook, Vanguard flipped the script on the traditional 60/40 portfolio model to instead emphasize a model portfolio with a 40/60 allocation to equities versus bonds – with a particular overweight on U.S. credit and long-term bonds. The company is also getting set to roll out a new Vanguard Short Duration Bond ETF (VSDB ) in early April. The new fund is aimed at providing clients with current income and lower price volatility consistent with short-duration bonds.
Rebecca Venter, senior fixed income product manager at Vanguard, told me there is a clear-cut case for active fixed income to continue to shine in the new year. “We’re now entering 2025 with a favorable outlook for fixed income. Yields are high relative to the post-GFC period, and they exceed inflation, offering investors the opportunity for real returns amid a backdrop of solid growth,” she said. “It’s likely we’ll see market volatility arise as new tax, trade, and immigration policies are debated, and a talented active team may be able to take advantage of these potential market movements to outperform.”
Most big government bond ETFs barely eked out positive returns in 2024. The forecast for 2025 is not much rosier. The 10-year Treasury yield just touched a fresh 14-month high – hovering around 4.80% – with most banks forecasting a yield of between 4%-4.50% by year-end. Because of this, advisors will likely scour the markets for investments that outperform the status quo and reach for extra yield wherever they can find it. Active fixed income strategies will continue to reap the benefits of that search.
| Top 10 Largest Active Bond ETFs | |
|---|---|
| Name | Total Assets ($MM) |
| JPMorgan Ultra-Short Income ETF (JPST) | 28,337 |
| Janus Henderson AAA CLO ETF (JAAA) | 17,675 |
| Fidelity Total Bond ETF (FBND) | 16,912 |
| PIMCO Enhanced Short Maturity Active ETF (MINT) | 12,005 |
| PGIM Ultra Short Bond ETF (PULS) | 9,596 |
| SPDR Blackstone Senior Loan ETF (SRLN) | 8,293 |
| First Trust Enhanced Short Maturity ETF (FTSM) | 6,157 |
| Dimensional Core Fixed Income ETF (DFCF) | 5,990 |
| iShares Ultra Short-Term Bond Active ETF (ICSH) | 5,294 |
| PIMCO Active Bond Exchange-Traded Fund (BOND) | 5,047 |
The $28 billion JPMorgan Ultra-Short Income ETF (JPST ) is the largest traditional active bond ETF on the market – followed by the Fidelity Total Bond ETF (FBND ) at $17 billion. The PIMCO Enhanced Short Maturity Active ETF (MINT ) takes third place with $12 billion in total assets.
So far, there hasn’t been much help from credit spreads. Investment-grade corporate spreads remain at historically tight levels not seen since the 2008 Financial Crisis.
Hurdles for Active Investment
Despite the rise of active products, there is still a gulch between active representation amid mutual funds versus ETFs. Right now, the fixed income mutual fund market is $4.5 trillion, and 78% of those assets are actively managed. By comparison, just over 10% of total fixed income ETF assets are parked in active fixed income ETFs – leaving plenty of room for growth in 2025.
Advisors may need to be more creative and tap into lesser-known strategies and asset classes, such as securitized debt and loans, for greater risk-adjusted returns. CLOs have remained resilient and attractive due to their floating-rate nature, providing optionality in an uncertain rate environment. They also allow investors to choose where they want to be on the credit risk spectrum.
The Janus Henderson AAA CLO ETF (JAAA) is currently the largest out there at $17 billion. However, recent entrants from the likes of VanEck, Palmer Square and Eldridge Capital have also garnered interest over the past year or two.
Private Debt Piquing Investors’ Interest
Bank loans, which are often considered proxies for private credit, have also been a bright spot in the business of bond ETFs. Asset managers have been pondering ways to package private assets into an ETF wrapper and have managed to break through with two products freshly launched last month – the BondBloxx Private Credit CLO ETF (PCMM ) and Virtus Seix AAA Private Credit CLO ETF (PCLO ). Both funds invest at least 80% of total assets in CLOs backed by private credit loans.
The global private credit market has doubled in size over the last five years and is now flirting with the $2 trillion mark. And the private credit CLO market is commanding an ever-greater share of the global CLO space. Meanwhile, the jury is still out on the private credit ETF proposed by Apollo Global and State Street Global Advisors. But the investment community will be keeping a close eye on developments under a new regime at the SEC.
Bottom line: 2025 is shaping up to be another strong year for fixed income ETFs. The growing interest in active fixed income ETFs, coupled with the potential for further product innovation, underscores the opportunity for this segment to capture a larger share of the market. As the fixed income landscape continues to evolve, adaptability and creativity will be key for investors seeking to optimize returns in an environment marked by both challenges and opportunities.
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