Active or Passive Bond Funds: Hype v. Facts
On October 28th JR spoke at the webinar “BrightTalk: Active v. Passive Bond Funds: Hype & Facts” on the trends of active versus passive fixed income options. Below is the presentation from that webinar.
Active or Passive Bond Funds: Hype v. Facts
- 2020 the year of active management for fixed income?
- Current state of ETFs
- S&P Dow Jones Indices SPIVA® U.S. Scorecard (S&P Index v. Active)
- Morningstar’s Active/Passive Barometer
- S&P’s U.S. Persistence Scorecard Year-end 2019 (Performance persistence)
- Compare actual 2020 YTD returns of active & passive of select bond ETFs
- New trends/new ETFs
Investor Behavior
Before we go too much further, we do need to talk about investor behavior. We all want to win. Nobody likes losses, there is the fear of missing out, no one likes to overpay for anything and investor inertia is hard to overcome.
- Win – we all want to outperform the market
- Losses – nobody likes losses
- FOMO
- Overpaying – CARFAX ads
- Inertia – change can be hard
Current State of Fixed Income ETFs
In looking at the overall state of fixed income Exchange Traded Funds or ETFs we can see that the total assets in these funds has grown to well over $1trillion. This is substantial growth as these funds really only began about 15 years ago. Most of the assets are in low-cost or low management fee products that represent the “beta” of the market they are tracking or passively managed to an index that tracks the market.
Sources: ETF Action. Data as 10/23/2020. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results.
S&P’s SPIVA U.S. Scorecard
“You are going to do what? “
Years ago, in 2009 or 2010, when I was still fairly new at S&P Indices the head of research called a meeting.
He introduced the SPIVA Scorecard: a semi-annual report that shows performance of active equity fund managers v. certain indices or benchmarks. It shows how infrequently stock pickers out pace the marketplace.
He also said he was adding fixed income funds to the report.
My reaction was “you are going to do what?” and “not going to work!” After all, active bond funds have the best fund managers, analysts, access to data, analytics, and access to bonds – they can beat an index! Boy was I wrong.
Years later, I still study this data. While at times, active managers do show some positive performance v. an index its not the majority of times and when it happens it seems to be very sporadic.
S&P’s SPIVA® U.S. Scorecard
Mid-Year 2020 Report
Source: S&P Dow Jones Indices LLC. SPIVA® U.S. Scorecard Mid-Year 2020 published September 21, 2020. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results.
S&P’s SPIVA® U.S. Scorecard: Close Up
Source: S&P Dow Jones Indices LLC. SPIVA® U.S. Scorecard Mid-Year 2020 published September 21, 2020. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results.
S&P’s SPIVA® U.S. Scorecard:
Investment-Grade Intermediate Funds
Source: S&P Dow Jones Indices LLC. SPIVA® U.S. Scorecard Mid-Year 2020 published September 21, 2020. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results.
S&P’s SPIVA® U.S. Scorecard:
High Yield Funds
Source: S&P Dow Jones Indices LLC. SPIVA® U.S. Scorecard Mid-Year 2020 published September 21, 2020. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results.
S&P’s SPIVA® U.S. Scorecard:
Emerging Markets Debts Funds
Source: S&P Dow Jones Indices LLC. SPIVA® U.S. Scorecard Mid-Year 2020 published September 21, 2020. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results.
S&P’s SPIVA® U.S. Scorecard:
General Municipal Debt Funds
Source: S&P Dow Jones Indices LLC. SPIVA® U.S. Scorecard Mid-Year 2020 published September 21, 2020. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results.
S&P’s SPIVA® U.S. Scorecard:
S&P’s SPIVA® U.S. Scorecard’s Mid-Year 2020 Report provides even more transparency, S&P also includes:
To provide even more transparency S&P includes the average performance of each group of funds v. the index performance. It provides the average performance calculated by equal-weight and by asset-weight. In either case, the data shows underperformance v. an index.
Source: S&P Dow Jones Indices LLC. SPIVA® U.S. Scorecard Mid-Year 2020 published September 21, 2020. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results.
Why is Performance so Bad?
- Indices don’t have trading costs or management fees
- Indices assume all bonds in the index are available for sale/purchase at the price used in the index
- Indices are rules based
- Portfolio managers make interest rate, duration, sector and credit risk allocations or “bets” in an effort to outperform
- But still…. I’d expect better performance statistics v. benchmarks
Morningstar’s Active/Passive Barometer
August 2020
The other resource available to us is Morningstar’s Active/Passive Barometer which can be found on www.morningstar.com. It evaluates active funds against a composite of actual passive funds.
High yield bond funds were modestly better with a 42% success rate.
S&P’s U.S. Persistence Scorecard
Year-end 2019
Does Past Performance Matter?
Source: S&P Dow Jones Indices LLC. S&P Persistence Scorecard published June 29, 2020. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results.
Source: S&P Dow Jones Indices LLC. S&P Persistence Scorecard published June 29, 2020. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results.
Broad Bond ETFs YTD Performance
Sources: ETFAction.com Chart is provided for illustrative purposes only. Past performance is not a guarantee of future results. Not all ETFs or asset classes represented here. FactSet classifications are used. Data as 10/21/2020.
Investment Grade Municipal Bond ETFs
YTD Performance
Sources: ETFAction.com Chart is provided for illustrative purposes only. Past performance is not a guarantee of future results. Not all ETFs or asset classes represented here. FactSet classifications are used. Data as 10/21/2020.
Intermediate Term Municipal Bond ETFs
YTD Performance
Sources: ETFAction.com Chart is provided for illustrative purposes only. Past performance is not a guarantee of future results. Not all ETFs or asset classes represented here. FactSet classifications are used. Data as 10/21/2020.
Mortgage Backed Bond ETFs
YTD Performance
Sources: ETFAction.com Chart is provided for illustrative purposes only. Past performance is not a guarantee of future results. Not all ETFs or asset classes represented here. FactSet classifications are used. Data as 10/21/2020.
USD High Yield Bond ETFs
YTD Performance
Sources: ETFAction.com Chart is provided for illustrative purposes only. Past performance is not a guarantee of future results. Not all ETFs or asset classes represented here. FactSet classifications are used. Data as 10/21/2020.
USD Senior Loan ETFs
Sources: ETFAction.com Chart is provided for illustrative purposes only. Past performance is not a guarantee of future results. Not all ETFs or asset classes represented here. FactSet classifications are used. Data as 10/21/2020.
Notable New Fixed Income ETF Launches
Switching the conversation over to new trends in the fixed income market we are seeing an increase in ESG related fixed income products become available. At the largest conference for ETFs, Inside ETFs in January of this year it was predicted that this would be the year of ESG related investing and certainly the products that have come to market include ESG. I’ve listed here a few new funds that have launched recently. Some are “me too” products aiming to compete head-to-head with existing funds and others are new concepts. Interesting to me is the iShares BB Rated Corporate Bond ETF (HYBB). This new fund gives is a new tool in the toolbox to invest in only the double B category of junk bonds. Why take on the risk of CCC or below bonds when you can grab incremental yield in the BB slice? Another example of new issuance is the Vanguard ESG U.S. Corporate Bond ETF (VCEB). While competing v. the iShares product it offers a slightly lower cost and while providing ESG factors for investing in fixed income.
10/13/2020 Avantis Core Fixed Income (AVIG)
- Management fee: 15bps
- Active overlay to the Bloomberg Barclays U.S. Aggregate Bond Index
10/6/2020: iShares BB Rated Corporate Bond ETF (HYBB)
- Management fee: 25bps
- Passive
10/2/2020: Clearshares Piton Intermediate Fixed Income ETF (PIFI)
- Management fee: 45bps
- Active
- Another entrant into the “core” fixed income ETF arena
9/22/2020: Vanguard ESG U.S. Corporate (VCEB)
- Management fee: 12bps
- Passive
- Based on MSCI’s U.S. Corporate SRI Index
- Competing v. iShares ESG Aware USD Corporate (SUSC) with management fee of 18bps.
Sources: ETFStrategy.com and Yahoo.com. Data as of 10/21/2020
Active or Passive Bond Funds:
Hype v. Facts, Key Takeaways
- So far, 2020 is NOT really the year of active management
- However, the ads for active management are compelling but data does not support the ads
- Manager selection can be difficult, and performance persistence is not consistent
- Smaller active funds performance can swing wildly due to tactical choices
- Passively investing? Know your index!
- Development of new ways to invest in the bond markets continues. Some are “me too” offerings and others are more unique that could give us better tools in the toolbox
- Follow me on LinkedIn: www.linkedin.com/in/james-j-r-rieger-2018 or www.straighttalkaboutbonds.com
Analyst Disclosure
At the time of this writing, JR Rieger’s fixed income related holdings include individual municipal bonds both investment grade and high yield, insured municipal bonds, municipal bond money market funds and a position in the VanEck Vectors High-Yield Municipal Index ETF (HYD).
A Bit About Me
- In 2018, I retired from S&P Global after a long career
- To stay in the markets, I write and speak about the bond markets via www.straighttalkaboutbonds.com
- Enjoy approx. 22.8k followers
- All done without charging any fees – yes, its free!
- I’m in the “gig” economy and provide consulting services for institutions on fixed income related challenges
- Index providers – index design, underserved and new asset classes
- Fund sponsors – index selection, fund positioning, mark-to-market issues
- Analytics providers – evolving fixed income analytics
- Bond data providers – creating new uses and new data capabilities
- Legal & compliance issues – fixed income mark-to-market (pricing)
- Heavy LinkedIn user: www.linkedin.com/in/james-j-r-rieger-2018
Click here for a print friendly version of the report.