Actively managed exchange traded funds, including clones and conversions of established open-end mutual funds, are contributing mightily to overall industry growth. Issuers of active fixed income ETFs should take a bow because those products have been major drivers of active ETFs’ ascent.
Still, on a percentage, actively managed fixed income ETFs represent small percentages of both the active and overall ETF landscapes, but to their credit, these products are adept at gaining assets. Through first quarter, active bond ETFs hauled in $42 billion in new cash, comparing favorably to the $57 billion advisors and investors allocated to index-based bond ETFs.
It helps that some well-known issuers, including some traditionally associated with mutual funds, are getting into and expanding in the active fixed income ETF space. Familiarity can breed confidence among advisors and clients while brand recognition and awareness help issuers haul in more assets.
So it can be said that everything mentioned is positive and it is, but with the universe of active bond ETFs expanding at a feverish pace, advised and self-directed investors are likely to have questions. At the very least, they be curious and advisors should be ready to address their queries about actively managed fixed income ETFs. Some of those questions are found below.
Understanding Conversions and Costs
With mutual fund-to-ETF conversions already possessing momentum and likely to accelerate later this year due to share class patent changes, clients need to be inquisitive about exactly what they’re getting when a bond fund undergoes that alteration.
In most instances, they’re not getting an identical twin to the mutual fund, but they are getting a sibling with highly similar identifying traits. Yes, end users should always mind what’s under any ETF’s hood, but in the conversion scenario, they’re getting a more portable, transparent, more tax efficient vehicle than a mutual fund. One that likely comes with a lower fee.
Speaking of fees, lower expense ratios are perhaps the biggest reasons ETFs have steadily pilfered assets from mutual funds over the years. Issuers know this and their new active bond offerings typically reflect advisors’ and investors’ demands for fee friendliness.
“So advisors, individual investors, all paying the same fees,” notes Morningstar’s Jason Kephart. “I think that’s another real benefit of the ETF structure that we don’t talk about enough maybe—is that they really are accessible to everyone, and I think that makes them a really advantageous head start over mutual funds.”
Performance: Active Bond ETFs Impress
Regardless of fund structure – ETF or mutual fund – there are advantages in the pairing of active management and bonds. Specifically, active managers can more readily capitalize on credit or duration opportunities or respond to related risks than indexes can.
That said, that flexibility hasn’t always been a guarantee that active bond managers will beat their benchmarks. So investors are right to ask about the performances of active fixed income ETFs. For now, it appears the news is broadly encouraging, thanks in large part to lower fees.
“According to our latest Active/Passive Barometer, over the last 10 years, the cheapest active bond funds have outperformed passive peers in general,” adds Kephart. “And so with active bond ETFs, that low cost is kind of built-in, so that really gives them a big advantage. So you might see strong performance from active bond ETFs going forward, too.”