After a series of industry and regulatory decisions in 2019, there’s been a lot of talk about “actively managed” exchange-traded funds, along with some speculation that investors are about to get lots more options in this category of financial products.
ETFs have been around since 1993, but have exploded in popularity over the past decade, at the same time as a sustained shift in investor behavior away from entrusting money to professionals who buy and sell actively, and toward cheaper autopilot options available.
But that state of play has an important caveat: it applies to stocks, not bonds.
In fact, one of the most important factors in that evolution, the tendency of fund managers to not only charge higher fees but also produce lower returns than indexes do, applies only to stock pickers.
Now, a new analysis from data firm CFRA adds to a chorus of other research that points out not only that fixed income funds do better when they’re actively managed, but that investors are hungry for such products.
The universe of actively managed ETFs is small, CFRA points out: there are about 320 such funds containing about $100 billion in assets. That makes up only about 2.5% of the total $4.13 trillion in ETF funds the Investment Company Institute says are outstanding.
But of that $100 billion, a few big funds dominate. MINT, an ultrashort fixed-income fund that many investors are attracted to as an alternative to a money market fund, makes up $14 billion of the total. Another $10 billion belongs to a MINT competitor, the JPMorgan Ultra-Short Income fund.
In fact, just eight of the biggest fixed-income ETFs account for half of that $100 million of actively-managed ETFs, as noted in the table below.
|ETF||Ticker||Assets, in billions|
|PIMCO Enhanced Short Maturity Active||MINT||$13.7|
|JPMorgan Ultra-Short Income||JPST||$10.2|
|iShares Short Maturity Bond||NEAR||$6.4|
|First Trust Enhanced Short Maturity||FTSM||$5|
|First Trust Preferred Securities & Income||FPE||$4.9|
|First Trust Low Duration Opportunities||LMBS||$3.9|
|SPDR DoubleLine Total Return Tactical||TOTL||$3.3|
|Invesco Ultra Short Duration||GSY||$2.7|
To some extent, the success of bond funds is straightforward. As MarketWatch reported in November, citing research from Guggenheim Partners, what we think of as “the stock market” is actually roughly 3,600 companies, all of which report their financial situation on a quarterly basis and trade on a daily basis. It is “as close to an efficient market as it gets,” Guggenheim said.
The “bond market,” in contrast, is made up of thousands of debtors of various types – municipal, corporate, sovereign – with issuances of different durations, credit profiles, collateral, borrowing purpose, and more. Bonds trade infrequently and often privately, making it harder to understand investor thinking on appropriate pricing.
When the broader fixed-income market, beyond just bonds, is considered, things get even more complicated. It’s a situation that seems ripe for active professional money management.
And a closer look at the biggest funds in the table above shows another interesting dynamic of the current investing landscape: investors may be so desperate for a little yield wherever it can be found that they’re using bond funds in place of money market accounts.
As CFRA’s Todd Rosenbluth told MarketWatch last summer, in a profile of MINT and JPST, “I am pleasantly surprised by how much demand there is for this and other ultra short bond ETFs because there are other ways to generate income in a falling interest-rate environment.”