Active Fixed Income ETFs and Market Growth

Active fixed income ETFs have been growing in popularity, with many investors seeking to tap into their potential for higher returns. According to the article, they have been gaining traction since 2020.

One key factor driving their growth is the increasing demand for yield in a low-interest-rate environment. This has led to a surge in the number of active fixed income ETFs being launched.

Investors are drawn to active fixed income ETFs because they offer the potential for higher returns than traditional fixed income investments. This is particularly appealing in a low-interest-rate environment where traditional fixed income investments may not be generating enough returns.

A notable example of this trend is the growth of ETFs that focus on high-yield bonds, which have seen significant inflows in recent years.

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Many investors are turning to actively managed fixed income ETFs, and for good reason.

One key advantage is that they provide access to a broad range of fixed income sectors. This allows advisors to potentially better align portfolios with clients' overall income and risk tolerance objectives.

Actively managed fixed income ETFs offer a more tailored approach, which can be especially beneficial for investors with unique needs.

They can help advisors navigate the yield and duration spectrum, providing a range of options to suit different investment strategies.

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The fixed income ETF market has seen significant growth in recent years, with assets under management increasing by 15% in 2020 alone. This growth is largely driven by investors seeking alternative sources of income in a low-interest-rate environment.

In the US, the fixed income ETF market is dominated by active managers, who account for 75% of the market. This is in contrast to the broader ETF market, where passive managers hold a significant majority.

As investors continue to seek out active fixed income ETFs, the outlook for the market remains positive, with experts predicting 10% annual growth over the next five years.

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The global fixed income universe is exceptionally deep, diverse, and complex, offering ample breadth for active managers. This breadth is staggering, with over 33,000 securities in a global bond index, compared to fewer than 9,000 holdings in a similar index of global stocks.

Many pockets of the fixed income universe exhibit dimensions of risk that give rise to inefficiencies and mispricing. This creates opportunities for active managers to use their skill to generate benchmark-beating returns.

Sources of excess return can be cyclical, arising from deviations from fair value and periodic movements in various markets. For example, mispricing on expected rate movements can occur as a result of Fed policy changes.

Temporary dislocations can also give rise to sources of alpha, such as contagion risk fears from a regional banking crisis distorting the fair value of non-related banking firms.

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The Federal Reserve's decision to commence a rate-cutting cycle is having a significant impact on the securitized and multi-sector credit markets. This shift in monetary policy is expected to influence the outlook for securitized assets.

The macroeconomic environment is a major factor in this development, and it's essential to consider its implications. The current state of the economy is influencing the demand for securitized assets.

A discussion on the outlook for securitized assets in the context of the Fed's rate-cutting cycle is crucial for investors and market participants. This is especially true given the current macroeconomic environment.

The Fed's rate-cutting cycle is expected to impact the securitized and multi-sector credit markets, and it's essential to stay informed about these developments.

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Active ETFs have experienced an incredible 51 consecutive months of inflows, showcasing their rapid growth in the market.

The growth of active ETFs can be attributed to their diverse range of fixed income strategies, which now span 27 different categories, up from 13 in 2013, with total assets exceeding $222 billion.

This surge in popularity can be seen in the fact that active fixed income ETFs have grown from $10.9 billion in assets in 2013 to over $222 billion today.

The SPDR ETF Strategy and Research team notes that as these funds mature and establish 5-year track records, a key barrier to entry (strategy due diligence) will be removed for many investors, further fueling growth.

Globally, active ETFs have accounted for almost a third of all inflows in the first quarter of 2024, indicating their significant impact on the market.

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Active fixed income ETFs offer a range of investment strategies that can help advisors better align portfolios with clients' income and risk tolerance objectives.

Active managers can exploit systematic and structural inefficiencies in fixed income through methods like security selection, cash management, sector rotation, yield curve positioning, and position sizing.

By using both top-down and bottom-up approaches, active managers can make informed portfolio decisions that incorporate fundamental research and quantitative techniques.

Active managers can rotate toward or away from certain risks, such as duration and credit quality, to potentially generate better returns.

Here are some key active fixed income strategies:

Historically, the majority of active intermediate core and core-plus strategies have produced above-benchmark returns, with an average of 55% of active managers outperforming their benchmark over the past decade.

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ETFs offer a range of investment options, from passive to actively managed funds.

The sheer size of the fixed income market creates opportunities for active investing, as mentioned in the fixed income market example.

ETFs can be a good choice for investors who want to actively manage their investments, but it's essential to decide when to take that step.

Active managers can potentially generate higher returns by applying their skills to the extraordinary breadth and depth of the fixed income universe.

Investors should consider their investment goals and risk tolerance before deciding whether to go active or passive.

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Active managers can exploit systematic and structural inefficiencies in fixed income through different methods, including security selection, cash management, sector rotation, yield curve positioning, and position sizing.

These methods allow managers to make active portfolio decisions using both top-down and bottom-up approaches that incorporate fundamental research and quantitative technique.

Active managers can rotate toward or away from certain risks, such as duration and credit quality, to potentially generate higher returns.

For example, an actively managed ETF may have the flexibility to buy off-the-run Treasury securities that offer better relative value compared to an index-tracking ETF.

This flexibility can be especially beneficial in the fixed income universe, which has over 33,000 securities, offering ample breadth for active managers to generate alpha.

Sources of excess return can be cyclical, arising from deviations from fair value and periodic movements in various markets, or tactical, where specific events may cause temporary dislocations.

Here are some key sources of excess return in the fixed income universe:

By understanding these sources of excess return, active managers can potentially capitalize on opportunities and generate higher returns for their investors.

Capturing yield, diversification, and growth from their fixed income allocations is a challenge facing investors.

Emerging markets debt hard currency investing offers a potential solution to this challenge. This asset class can provide higher yields compared to traditional fixed income investments.

Investors should review the Terms and Conditions of third-party websites before investing in emerging markets debt hard currency.

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