Active ETF Strategies Are Gaining a Greater Foothold in the Fixed Income Segment

New regulations and increased demand for greater investment options have helped active fund managers find greater success in the traditional passive index-based bond exchange traded fund segment.

Passive index-based offerings from big names like iShares, Vanguard, and State Street continue to dominate the fixed income ETF segment, but the adoption of new rules implemented by the U.S. Securities and Exchange Commission in 2019 has helped make it easier for actively managed ETFs to hit the market, the Financial Times reports. Since then, a number of smaller asset managers have jumped into the fixed income ETF universe with their own specialized offerings.

Actively managed ETF strategies allow newer entrants to distinguish themselves from first movers by offering up their own particular investment methodologies. These active ETFs also allow their managers to generate bigger profits, with the average fee among U.S. active bond ETFs sitting at about 0.5%, according to Morningstar data, compared to 0.3% for passive index-based ETFs.

According to Capital Group, actively managed fixed income funds are expanding at about 43%, while fixed income ETFs are growing at about the same pace as the broader ETF market at roughly 23% over the past five years.

Since 2021, 65 out of the 105 new fixed income ETFs to list in the U.S. have been actively managed, according to Morningstar data. Meanwhile, net inflows to actively managed bond ETFs were also the largest on record in 2021, according to EPFR data.

Nevertheless, passive index-based ETFs remain the dominant force as active ETFs play catch-up. U.S.-listed bond ETFs attracted $26.5 billion in net inflows over 2021, while traditional passive ETFs brought in $161.3 billion. Globally, active bond ETFs saw a net $32.7 billion in inflows compared to $218.4 billion for passive funds.

“What rule 6c-11 [the new regulation adopted by the SEC in 2019] did was really democratize the ability to bring new ETFs to market,” Holly Framsted, the head of ETFs at Capital Group, who previously worked at BlackRock, told the Financial Times.

Capital Group was among the most recent new entrants to step into the ETF market, with five active equity strategies and one active fixed income option.

“There is a large opportunity for us to see greater diversification among the premiere ETF providers, just as there is broad diversification among the premiere asset managers in the mutual fund space today,” Framsted added.

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