The latter half of 2024 is looking promising for active bond ETFs, as discussed by Fidelity’s Michael Plage, CFA. He emphasizes factors such as inflation, employment, and the Fed’s response to data. The limitations of passive bond investing create opportunities for active managers, as shown by Fidelity’s active fixed income strategies with FTBD and FIGB.
Schwab Asset Management launched its first actively managed fixed income ETF, the Schwab Ultra-Short Income ETF (SCUS), with a low net expense ratio of 0.14%. SCUS aims to provide investors with current income, capital preservation, and liquidity by investing in short-term investment grade securities. The fund’s focus on short-duration assets helps mitigate risks from shifting interest rates.
Bond and related ETFs could be poised for success as market turbulence prompts calls for earlier Fed rate cuts. The WisdomTree U.S. Short Term Corporate Bond Fund (QSIG) is a compelling option for income investors, as the economy cools and potential Fed rate cuts benefit high-quality bonds. QSIG’s strong fundamentals and sector exposure add to its appeal.
The KraneShares Sustainable Ultra Short Duration Index ETF (KCSH) offers low-risk income investing with notable yields and diversification. It focuses on ultra-short investment-grade corporate bonds in USD, aiming to outperform Treasuries and money markets. The strategy emphasizes sustainability, excluding fossil fuel issuers and aligning with the Paris Agreement. This makes KCSH a strong addition to an income portfolio.
Investors are seeking bond exposure in anticipation of interest rate cuts, aiming to benefit from rising bond prices as yields fall. The NEOS Enhanced Income Aggregate Bond ETF (BNDI) provides core bond exposure and income through its active management, including a put option strategy and tax-efficient approach. With a distribution yield of 5.2%, it offers an opportune investment option.
Over the past two decades, the corporate bond market has evolved significantly, with the investment grade (IG) market growing by 308% to $6.6 trillion, and the high yield (HY) market growing by 131% to $1.3 trillion. This growth has led to a shift in the quality and composition of both markets, offering diversification opportunities for investors.
Speculation is growing that the Federal Reserve may cut interest rates by up to 50 basis points. As a result, investors are looking into fallen angel bonds, which have historically outperformed in similar scenarios. The VanEck Fallen Angel High Yield Bond ETF (ANGL) is a potential vehicle for this strategy, offering a 30-day SEC yield of 6.54%.
The Q3 Fixed Income Symposium, hosted by VettaFi, featured insight from industry leaders. They discussed expectations for interest rate cuts, potential investment options, active management momentum, and strategies for managing interest rate risk and inflation protection. Attendees highlighted the rise of actively managed fixed income strategies and projected continued dominance of fixed income discussions into 2025.
Corporate bonds offer a balance of yield and credit quality, making them attractive for investment-grade portfolios. MarketWatch noted increasing demand, particularly for tech giants’ bonds like Nvidia and Amazon. Vanguard offers three corporate bond options: VCSH for short maturity, VCIT for intermediate yield and rate balance, and VCLT for maximum yield.
Investment-grade municipal bonds showed minimal movement in the first half of 2024, but could see a resurgence in the second half. The ALPS Intermediate Municipal Bond ETF (MNBD) may benefit from potential muni bond recovery, especially with anticipated Federal Reserve rate cuts. Historical data and muni-to-Treasury ratio support the case for munis. Demand for tax-exempt income remains strong.
The VanEck Emerging Markets High Yield Bond ETF (HYEM) has shown potential for pleasant surprises, outperforming the Bloomberg U.S. Aggregate Bond Index. Despite being perceived as riskier, HYEM offers extensive perks including yield pickup, higher quality, and diversification benefits, making it an appealing option for investors seeking strong income opportunities in emerging markets.
In the first half of 2024, fixed income ETFs accounted for 29% of U.S. industry flows, despite representing 18% of the asset base. VettaFi recently hosted an event covering investment styles and analyzed advisor responses. Advisors are exploring various fixed income ETFs to manage credit and duration risks effectively. Examples include AGG, LQD, VCLT, BSCY, JNK, CLOZ, SCHO, USFR, and TLT.
Fixed income behaves differently during Fed interest rate cycles. Historical cutting periods saw lower bond yields across the curve with steepening spreads, resulting in solid total returns. Conversely, hiking cycles led to higher yields and flatter spreads, resulting in lower total returns. “On hold” periods saw rangebound yields and solid total returns. Recent data suggests a coming rate cut, favoring defensive positioning.
Corporate bond futures provide more precise risk management for investors. Investment grade bonds correlate with Treasuries, but the correlation can drop during market stress. High-yield bonds correlate more with the S&P 500. Futures enable scaling of risk exposures and offer optionality, reflecting the dependence on corporate health. These dynamics shape the economics of corporate bond markets.
