Are active bond funds worth it?
While ETFs grew out of a passive, index-tracking approach to investing, more actively managed ETFs than passive ones have been launched over the past 2 years. Actively managed ETFs are especially well-suited to bond investing because bond markets are relatively large and inefficient compared with stock markets.
Unlike the median active equity manager, which has underperformed its passive counterpart, the median active bond manager has outperformed the median passive manager by about 50 basis points over the last 10 years.
Bonds are providing healthier yields than we've seen since before the 2008 global financial crisis. Higher current yields support a much-improved outlook for bond returns going forward.
Passive bond funds have lower fees and lower turnover compared to active bond funds, that's two things that won't eat into your returns. On the flip side, active bond managers tend to veer away from the index-based portfolio of passive funds, taking risks that could deliver huge rewards.
Key central bank rates and bond yields remain high globally and are likely to remain elevated well into 2024 before retreating. Further, the chance of higher policy rates from here is slim; the potential for rates to decline is much higher.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
The disadvantages of bond funds include higher management fees, the uncertainty created with tax bills, and exposure to interest rate changes.
Credit spreads remain very tight, and the yield you can earn when adjusted for duration favors high-quality intermediate bonds. So, investors are not really being paid to take on credit or interest rate risk.” Others have said that 2024 might be the time to invest toward the longer end of the risk-return spectrum.
Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.
Why interest rates affect bonds. Bond prices have an inverse relationship with interest rates. This means that when interest rates go up, bond prices go down and when interest rates go down, bond prices go up.
Do active funds beat the market?
Active managers' underperformance in 2023 is still better than the 64% average annual rate reported over the 23-year history of the SPIVA scorecards, said the report, which was released Wednesday. Over the past 15 years, 88% of large-cap stock funds underperformed the S&P 500, while 93% of funds did so over 20 years.
Fund Name | Fund Category | 5 Year Return (Annualized) |
---|---|---|
Mahindra Manulife Multi Cap Fund | Equity | 26.65 % p.a. |
Nippon India Multi Cap Fund | Equity | 21.53 % p.a. |
Quant Active Fund | Equity | 30.88 % p.a. |
ICICI Prudential Multicap Fund | Equity | 19.95 % p.a. |
Actively managed funds are worth the risk if the fund manager can consistently beat the benchmark and generate alpha (excess returns) for the investors. However, this is not easy to achieve and depends on various factors, such as the fund manager's skill, market conditions, fund size, and expenses.
We expect bond yields to decline in line with falling inflation and slower economic growth, but uncertainty about the Federal Reserve's policy moves will likely be a source of volatility. Nonetheless, we are optimistic that fixed income will deliver positive returns in 2024.
Although, cash yields (as represented by short term government bonds) appears to be around 5.2% today, I expect the actual yield for an investor holding through the Fed cuts in 2024 will be less than 4.7%, which is almost the same as the current 4.6% yield of the Bloomberg U.S. Aggregate Index.
Fund (ticker) | Expense Ratio |
---|---|
American Century High Income Fund Investor Class (AHIVX) | 0.78% |
Northern Multi-Manager High Yield Opportunity Fund (NMHYX) | 0.68% |
Touchstone Ares Credit Opportunities Fund Class Y (TMAYX) | 0.88% |
Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) | 0.23% |
Funds Hurt in the Drawdown
9, 2023. This year's drawdown wasn't as severe as the losses many funds endured in 2022. The iShares Core Us Aggregate Bond ETF lost 13.1%, making for its worst year on record.
The table on the right shows that bond prices often recover within 8 to 12 months. Unnerved investors that are selling their bond funds risk missing out when bond returns recover. It is important to acknowledge that some of those strong recoveries were helped by bond yields that were higher than they are today.
Including bonds in your investment mix makes sense even when interest rates may be rising. Bonds' interest component, a key aspect of total return, can help cushion price declines resulting from increasing interest rates.
Bonds are generally considered a less-risky complement to the volatility of stocks in an investment portfolio. U.S. Treasurys, and specifically Treasury bills and Treasury notes, are the benchmark for a nearly risk-free investment if held to maturity.
Is it better to buy bonds or bond funds?
If you are looking for predictable value and certainty for your financial goals, then individual bonds may be a better fit. Meanwhile, if you are looking for professional management and want greater diversification for your financial goals, then bond funds may be a better fit.
2 When the market consensus is that a rate increase is right around the corner, it's time to go to market. Unless you are set on holding your bonds until maturity despite the upcoming availability of more lucrative options, a looming interest rate hike should be a clear sell signal.
Rank | Fund | 3-year return to 1 Feb (%) |
---|---|---|
2 | Vanguard LifeStrategy 80% Equity | 16.05% |
3 | Fundsmith Equity | 24.6% |
4 | Jupiter India I Acc | 108% |
5 | Royal London Short Term Money Mkt | 6.73 |
Boxenbaum, chief financial planner and investment retirement advisor at Statewide Financial Group, is yes and no. “With I bonds, your principal is protected and safe. However, if you cash the bond out before five years, then you will lose up to the last three months of accrued interest.
When evaluating an individual bond or bond fund, consider focusing on the fundamentals. The bond or fund's share price, its 30-day yield, and its total return over time are key to its performance. Also pay attention to the types of bonds in your fund and the fund's credit risk.
References
- https://www.investopedia.com/should-you-save-your-money-or-invest-it-depends-4692975
- https://fundselectorasia.com/10-funds-that-beat-the-sp-500-by-over-20-in-2023/
- https://www.forbes.com/advisor/investing/best-low-risk-investments/
- https://smartasset.com/investing/bond-funds
- https://brainly.com/question/31738313
- https://www.sec.gov/investor/pubs/tenthingstoconsider.htm
- https://www.nerdwallet.com/article/investing/passive-investing
- https://www.investopedia.com/terms/p/passiveinvesting.asp
- https://helpfiles.thepensionsregulator.gov.uk/members/valueatriskdetailsadd
- https://www.bajajfinserv.in/investments/passive-funds-vs-active-funds
- https://www.jpmorgan.com/insights/investing/investment-strategy/emerging-investment-trends-we-think-could-endure-in-2024
- https://www.robeco.com/en-int/insights/2023/04/the-golden-rule-of-investing
- https://fortune.com/recommends/investing/golden-rules-of-investing/
- https://www.usatoday.com/money/blueprint/investing/are-i-bonds-safe/
- https://twitter.com/DaveRamsey/status/1740392947818905964
- http://static.fmgsuite.com/media/documents/e4086fab-c974-4553-b223-83e9290b2f09.PDF
- https://www.pimco.com/en-us/marketintelligence/navigating-interest-rates/how-do-rates-affect-bond-performance
- https://www.fca.org.uk/investsmart/understanding-high-risk-investments
- https://www.actuaries.org.uk/documents/practicalities-budgeting-managing-and-monitoring-active-risk-pension-funds
- https://www.thriventfunds.com/insights/mutual-fund-focus/active-passive-fund-management-whats-the-difference.html
- https://www.barrons.com/articles/stock-market-active-mutual-large-cap-funds-54ce55fc
- https://www.investopedia.com/investing/the-lowdown-on-index-funds/
- https://www.forbes.com/advisor/in/investing/index-funds-vs-mutual-funds/
- https://investor.vanguard.com/investor-resources-education/article/are-bonds-a-good-investment-right-now
- https://www.icicibank.com/blogs/mutual-fund/short-time-investmet
- https://www.getsmarteraboutmoney.ca/learning-path/getting-started/understanding-active-vs-passive-investing/
- https://www.investopedia.com/news/active-vs-passive-investing/
- https://www.nerdwallet.com/article/investing/active-vs-passive-investing
- https://citywire.com/pro-buyer/news/active-funds-enjoy-run-of-outperformance-versus-passive-peers-morningstar/a2425809
- https://ledyard.bank/Wealth-Management/Insights/Articles/Our-Guide-to-Riding-Out-the-Bond-Market-Storm
- https://www.thinkadvisor.com/2024/02/13/bond-investing-in-2024-everything-for-advisors-to-know/
- https://corporatefinanceinstitute.com/resources/fixed-income/debt-bond-fund/
- https://www.investopedia.com/terms/a/activemanagement.asp
- https://www.vinovest.co/blog/passive-investing-vs-active-investing
- https://www.investopedia.com/managing-wealth/basic-investment-objectives/
- https://fortune.com/recommends/investing/safe-investments/
- https://www.usbank.com/investing/financial-perspectives/market-news/interest-rates-affect-bonds.html
- https://www.maxlifeinsurance.com/blog/investments/what-is-investment
- https://www.experian.com/blogs/ask-experian/pros-cons-of-buying-stocks/
- https://www.forbes.com/sites/investor-hub/article/index-fund-vs-mutual-funds/
- https://www.nasdaq.com/articles/you-wont-believe-how-much-more-warren-buffett-has-made-than-the-market-since-1965
- https://www.lehnerinvestments.com/en/active-vs-passive-investing/
- https://www.investopedia.com/articles/bonds/08/bond-portfolio-strategies.asp
- https://www.investmentadviser.org/active-managers-council/what-is-active-management/
- https://www.skagenfunds.fr/topic/active-management/ten-reasons-to-choose-active-management/
- https://www.wellsfargo.com/goals-investing/why-invest/
- https://smartasset.com/investing/portfolio-management-strategies
- https://www.gobankingrates.com/investing/strategy/toxic-investments-you-should-avoid/
- https://www.nerdwallet.com/article/investing/index-funds-vs-mutual-funds
- https://www.linkedin.com/pulse/financial-mirage-why-most-active-fund-managers-cant-beat-market
- https://www.schwab.com/learn/story/bonds-vs-bond-funds-which-is-right-you
- https://www.investopedia.com/why-bond-etfs-go-down-8303231
- https://www.fidelity.com/learning-center/trading-investing/how-to-invest-during-recessions
- https://www.financial-planning.com/list/profunds-direxion-rydex-mutual-funds-with-the-best-10-year-returns
- https://www.sofi.com/learn/content/goals-based-investing/
- https://www.icicibank.com/blogs/investment/simple-step-goal-based-investment
- https://www.morningstar.com/markets/markets-brief-these-funds-fared-worst-bond-market-selloff
- https://www.schwab.com/learn/story/fixed-income-outlook-rocky-road-bond-market
- https://executiveeducation.wharton.upenn.edu/thought-leadership/wharton-wealth-management-initiative/wmi-thought-leadership/active-vs-passive-investing-which-approach-offers-better-returns/
- https://www.zeebiz.com/personal-finance/news-active-funds-vs-passive-funds-what-is-the-difference-and-which-one-can-be-good-for-you-277264
- https://www.livemint.com/money/personal-finance/mutual-funds-confused-between-active-and-passive-funds-here-is-your-answer-11684392778140.html
- https://www.troweprice.com/content/dam/iinvestor/images/HardCd_dwnld_UnderstandBondsRisingRate02282019.pdf
- https://www.capitalgroup.com/institutional/insights/articles/core-bond-themes-2024.html
- https://www.naukri.com/campus/career-guidance/what-are-your-short-term-and-long-term-goals
- https://www.investopedia.com/articles/forex/033015/10-riskiest-investments.asp
- https://www.fuqua.duke.edu/duke-fuqua-insights/why-active-investing-good-economy
- https://www.businessinsider.com/personal-finance/passive-vs-active-investing
- https://www.forbes.com/advisor/investing/index-funds-vs-mutual-funds/
- https://www.ig.com/uk/glossary-trading-terms/active-investment-definition
- https://www.financestrategists.com/wealth-management/investment-risk/active-risk/
- https://www.nerdwallet.com/article/investing/bond-market-crash
- https://kayne.com/insights/active-vs-passive-investing-strategies/
- https://www.brewin.co.uk/insights/active-vs-passive-investing-pros-and-cons
- https://www.finax.eu/en/blog/how-many-actively-managed-mutual-funds-regularly-beat-the-market
- https://www.forbes.com/advisor/retirement/best-high-yield-bond-funds/
- https://finance.yahoo.com/news/invested-1000-netflix-decade-ago-133004497.html
- https://www.investopedia.com/invest-for-short-term-and-long-term-goals-8347417
- https://portfolio-adviser.com/aj-bell-36-of-active-funds-outperform-passive-in-2023/
- https://www.fool.com/investing/how-to-invest/active-vs-passive-investing/
- https://www.lawinsider.com/dictionary/active-strategy
- https://www.bankrate.com/investing/best-long-term-investments/
- https://www.fool.com/investing/2023/11/26/want-to-outperform-92-of-professional-fund-manager/
- https://www.morganstanley.com/articles/active-vs-passive-investing
- https://www.investopedia.com/terms/a/activerisk.asp
- https://www.investopedia.com/terms/a/activeinvesting.asp
- https://www.investopedia.com/terms/a/active_index_fund.asp
- https://www.thrivent.com/insights/investing/3-bond-investment-strategies-to-diversify-your-portfolio
- https://www.alliancebernstein.com/corporate/en/insights/investment-insights/fixed-income-outlook-2024-bonds-roar-back.html
- https://onlinelibrary.wiley.com/doi/abs/10.1002/bdm.2344
- https://www.investopedia.com/articles/investing/040115/how-create-your-very-own-etf.asp
- https://www.fidelity.com/learning-center/investment-products/etf/types-of-etfs-actively-managed
- https://www.investopedia.com/articles/investing/110915/3-signs-its-time-sell-your-bonds.asp
- https://fastercapital.com/content/Active-Risk-and-Tracking-Error--Navigating-Portfolio-Volatility.html
- https://www.cambridgeassociates.com/insight/improving-investment-returns-manager-sizing-with-active-risk/
- https://fortune.com/recommends/investing/how-to-start-investing/
- https://www.ii.co.uk/analysis-commentary/top-10-most-popular-investment-funds-january-2024-ii530620
- https://finance.yahoo.com/news/13-stocks-outperform-p-500-165621345.html
- https://www.thebalancemoney.com/active-vs-passive-management-in-bond-funds-416943
- https://www.etmoney.com/mutual-funds/equity/multi-cap/34
- https://www.nasdaq.com/articles/if-you-invested-$1000-in-sp-global-10-years-ago-this-is-how-much-youd-have-now
- http://www.projectinvested.com/markets-explained/bond-investment-strategies/
- https://www.reddit.com/r/CFA/comments/viumo8/l2_r43_optimal_amount_of_active_risk_formula_in/