Why Active Fixed-Income Launches Aren’t Slowing Down

The bond market is far from fixed.

More ETF providers are diving headfirst into the world of active fixed-income funds, with Vanguard launching a bond index ETF (VCHY) last week that provides index‑based exposure to high‑yield corporate bonds. The fund is unique in that it offers a lower-cost way for investors to access high-yield fixed-income products, which typically have higher expense ratios. (The average fund fee in this category is 0.44%, while VCHY’s fee is .05%.) The move is the latest by a major fund manager to bring active fixed-income to the retail space, and it’s emblematic of the industry-wide growth into new areas like collateralized loan obligations, said Greg Stumm, CEO of American Beacon Partners.

“You don’t really see a lot of CLO mutual funds,” Stumm said. “But with the growth of the CLO market and the way the ETFs trade, they’re able to take active strategies into the CLO space, which is kind of a whole new area for the wealth market.”

Where No Manager Has Gone Before

Fixed-income ETFs have been around since the early 2000s, but now managers are more willing to launch funds that wouldn’t have been advisable (or possible) five years ago, Stumm said. Vanguard’s new fund tracks a market‑value‑weighted index that provides exposure to corporate bonds with the goal of limiting issuer concentration, which can happen when a fund’s portfolio is weighted unevenly toward a small number of underlying companies. “Our goal has been to take the expertise we’ve built over decades in active fixed-income mutual funds and extend that … into the ETF wrapper,” said Brad Collins, a fixed income specialist at Vanguard. “And while corporate bonds are one component, it’s not just about a single sector.”

Vanguard isn’t alone. JPMorgan launched a fund last month that invests in fixed-income and floating-rate debt securities. And last year, Simplify Asset Management launched four government money market ETFs, which before then was a strategy only available as a mutual fund, said Jason England, a portfolio manager and fixed income strategist at Simplify Asset Management.

Wrap It Up: The widening accessibility  of once-restricted asset classes is another trend helping increase the popularity of active fixed income funds, said England. There are also more wrapper options, as well as growing use of derivatives. “The wrapper options have changed,” England said. “Getting institutional grade-caliber strategies inside the ETF wrapper, the retail adviser can access it, where before only high-net-worth and institutional investors could access some of these strategies.”