John Boggle seemingly settled the active versus passive debate decades ago, pioneering the low-cost index funds that dominate today’s market. By some estimates, passive investing accounts for nearly half of the stock market, with investors basing their purchasing decisions on little more than a company’s relative size.
Tech companies like Apple, Microsoft, and NVIDIA account for roughly six percent (each) of the S&P 500 index. So, for many passive investors, $18 of every $100 is going toward these three companies regardless of whether they’re overvalued or overhyped.
The million-dollar question is: Can active investors do better?
Active Fixed Income Outperforms
Active investors have a mixed track record at best across most asset classes. Morningstar’s Active vs. Passive Barometer found that it was a coin flip whether active funds outperformed passive ones during the 12 months through June 2024—but, of course, the active versions came with much heftier expense ratios!
But there’s a caveat: fixed income is the exception to the rule.
The same report found that 67% of active funds beat their passive counterparts during the 12 months through June 2024. Over the long term, more than 38% of them succeeded over the past 15 years while asset-weighted returns on active funds exceeded the indexed payoffs across all three fixed-income strategies.
The reason is simple: active managers have more flexibility in an illiquid market.
The Bloomberg U.S. Aggregate Bond Index has over 12,000 individual securities, but many are thinly traded, making it hard for passive indexes to fully replicate. Meanwhile, if a certain industry experiences a deterioration in credit quality or interest rates change, passive funds don’t have the flexibility to quickly adapt.
For instance, active intermediate core bond funds courted more credit risk with shorter durations than index offerings during the 12 months through June 2024. This posturing was ideal as credit spreads narrowed and persistent inflation pushed back the timeline for interest rate cuts. This gave these funds a 72% success rate over their passive comps.
What Funds Are Outperforming?
Active bond funds may enjoy some advantages over passive alternatives, but that doesn’t make picking the right fund any easier. For example, the top funds of 2024 may not have a great three- or five-year track record while the best long-term performers may have had an off year. And that’s not to mention the need to factor risk into the decision.
Bond Mutual Funds
These funds are sorted by YTD total return, which ranges from 1.5% to 3%. They have an AUM between $690M and $48.1B and expenses between 0.30% and 0.87%. They are currently yielding between 3.4% and 4.1%.
| Name | Ticker | Type | Actively Managed? | AUM | YTD Total Ret (%) | Yield | Expense |
|---|---|---|---|---|---|---|---|
| Fidelity Intermediate Bond Fund | FTHRX | Mutual Fund | Yes | $3.56B | 3% | 3.4% | 0.44% |
| JPMorgan Mortgage-Backed Securities Fund | OMBAX | Mutual Fund | Yes | $5.85B | 2.2% | 3.6% | 0.87% |
| Baird Aggregate Bond Fund | BAGIX | Mutual Fund | Yes | $48.1B | 1.9% | 4% | 0.3% |
| Fidelity Investment Grade Bond Fund | FGBAX | Mutual Fund | Yes | $8.89B | 1.5% | 3.4% | 0.75% |
| Neuberger Berman Core Bond Fund | NCRAX | Mutual Fund | Yes | $695M | 1.5% | 4.1% | 0.80% |
Active Bond ETFs
These ETFs are sorted by YTD total return, which ranges from 2.4% to 5%. They have an AUM between $2.7B and $11B and expenses between 0.36% and 0.71%. They are currently yielding between 3.7% and 5.5%.
| Name | Ticker | Type | Actively Managed? | AUM | YTD Total Ret (%) | Yield | Expense |
|---|---|---|---|---|---|---|---|
| PIMCO Enhanced Short Maturity Active Exchange-Traded Fund | MINT | ETF | Yes | $11B | 5% | 5.1% | 0.36% |
| iShares Flexible Income Active ETF | BINC | ETF | Yes | $2.69B | 4.9% | 5.5% | 0.53% |
| PIMCO Active Bond Exchange-Traded Fund | BOND | ETF | Yes | $4.23B | 2.7% | 5.1% | 0.71% |
| Fidelity Total Bond ETF | FBND | ETF | Yes | $9.45B | 2.4% | 3.7% | 0.36% |
Of these funds, BINC is one of the more interesting options. The fund managers take a nimble multi-sector approach, targeting hard-to-reach fixed income sectors. With a 12% one-year total return and a 5.5% trailing 12-month yield, the fund holds a diverse portfolio ranging from emerging market bonds to high-yield corporate bonds to MBS.
When choosing between these options, you should carefully consider your target duration, income objectives, and the impact of fees. Depending on the fund, you may also want to consider the credit risk of the underlying portfolio—particularly for active funds that build concentrated portfolios of bonds targeting price upside.
The Bottom Line
The active versus passive debate might be over for equities on the whole, but many active funds outperform their passive counterparts in fixed income. Investors willing to branch out in the fixed income space may want to consider established options like BOND or more exotic new funds like BINC, offering much more diverse and opportunistic exposure.
