fixed income etfs
active fixed income
Here’s Why High-Yield Bonds Are Outperforming
Recent economic data and tea leaves from Fed officials have resulted in more challenging
conditions for fixed income. Essentially, there is much less certainty about the timing and
direction of the Fed’s next move as economic data and inflation have been more robust than
expected.
According to Michael Arone, chief investment strategist at State Street, this presents an
opportunity with high-yield bonds given that yields are at attractive levels while a strong
economy indicates that defaults will remain low. So far this year, high-yield bonds have
outperformed with a slight positive return, while the iShares Core US Aggregate Bond ETF
(AGG) and Vanguard Total Bond Market ETF (BND) are down YTD.
This is a contrarian trade as high-yield bond ETFs have had $387 million of outflows YTD, while
fixed income ETFs have had $2.8 billion of net inflows YTD. It’s also a way for fixed income
investors to bet that the US economy continues to defy skeptics and avoid a recession despite
the Fed’s aggressive rate hikes.
Currently, high-yield bonds have an average spread of 338 basis points vs Treasuries. Many of
the most popular high-yield ETFs have effective durations between 3 and 4 years which means
there is less rate risk. Spreads have remained relatively tight and could widen in the event of the
economy slowing.
Finsum: High-yield ETFs are offering an interesting opportunity given attractive yields. This
segment of the fixed income market also is benefitting from recently strong economic data
which indicates that default rates will remain low.
Category: Bonds: Total Market
Keywords: #bonds; #ETFs; #fixed income; #yields; #inflows; #high yield; #Fed; #macro;
#inflation;
Benefits of Active Fixed Income ETFs
A major development in 2023 was the boom in active fixed income ETFs as measured by
inflows and launches of new ETFs. Some reasons for interest in the category include
opportunities for outperformance, lower volatility, and diversification. Ford O’Neil, fixed income
portfolio manager at Fidelity Investments sees structural reasons for the asset class’ recent
success and believes it will continue.
According to O’Neill, there is more potential for outperformance in active fixed income vs
equities, because indices only cover about half of the total bond market. In contrast, equity
indices encompass a much larger share of the entire stock market. This means that the market
will be less efficient, resulting in more undervalued securities.
Active managers are also able to better navigate the current landscape, where there is
considerable uncertainty about the economy and monetary policy given more latitude when it
comes to security selection. He notes that active fixed income ETFs have delivered strong
outperformance vs passive fixed income ETFs over the last 8 years.
He stresses that identifying these opportunities is dependent on proper fundamental research
and quantitative analysis followed by effective implementation. O’Neil is the co-manager of
several active fixed income ETFs including the Fidelity Total Bond ETF (FBND) or the Fidelity
High Yield Factor ETF (FDHY).
Category: Bonds: Total Market
Keywords: #bonds; #ETFs; #fixed income; #active ETFs; #active management; #Fidelity;
