The growth of active ETFs has been stellar over the last few years. Thanks to SEC changes, Wall Street has launched numerous products covering a wide range of stock, bond, and alternative strategies using various new active ETF structures. Investors of all sizes and financial advisors have been quick to snap up all these new funds.
But the more things change, the more they stay the same.
While results have gotten better, when it comes to active management, stock pickers are still having a tougher time overall beating the market. But for bond selectors, the choice is clear. Active still rules the roost.
Stock Pickers Still Struggle
One of the biggest battles and continued fights among market pundits remains whether or not indexing or active management is the best choice for investors’ portfolios. Historically, passive has been the crown holder. When he launched Vanguard and the first S&P 500 index, Jack Bogle argued that broad index funds not only offer plenty of diversification but, thanks to their lower costs, would continue to eat active management’s lunch for the long haul. Bogle’s assertion was right on the money. And with the creation of ETFs, the effect has been heightened.
Using the ETF structure as an advantage, many active managers have started to close the gap, with more of them starting to outperform their indexes. One of the major reasons continues to be the lower fee hurdle that ETFs charge, as well as less cash drag and lower taxes.
But the outperformance isn’t vast.
According to S&P Global’s latest SPIVA U.S. Scorecard—which looks at active vs. passive returns—65% of all large-cap U.S. equity funds managed to underperform their indexes over the last year. Longer term, the numbers are even worse with 95.48% of all active managers underperforming their benchmarks since 2005. 1
Now, the better near-term results have been helped by the lower-fee hurdle. And that’s a huge win for active stock management. However, the struggle remains within market efficiency and being able to quickly disseminate discrepancies.
The world of large-cap stocks—as represented by the S&P 500—is a pretty efficient sandbox to play in. The process of valuing, buying, and selling stocks is very efficient. There’s not much more a manager can add to this sector of the market, unless they focus on high conviction/a small number of holdings. And it’s true that these types of funds are the ones that outperform benchmarks.
This efficiency of information and valuation keeps the lid on active gains within the large-cap space.
Bonds Are Opposite
What potentially doesn’t work for equities works amazingly well for bonds. In fact, the majority of active bond managers have outperformed their benchmark indexes over time; in many cases, that outperformance has been significant.
This chart from Fidelity Institutional highlights the outperformance of active bond funds that are benchmarked to the Bloomberg Bond Aggregate Index.
Source: Fidelity Institutional
According to Fidelity, this outperformance is due to the size, complexity, and inefficiency of the bond markets. Skilled active managers have the ability to find and create opportunities to outperform popular bond benchmarks.
For example, the Agg already has about 25x the number of securities as the S&P 500. That’s a bigger sandbox to exploit. Moreover, the Agg is just a small fraction of the $58 trillion overall bond market. There is so much inefficiency to dig through within the bond world. 2
Better still, there are potentially more tools for a bond manager to use while doing this digging. This includes credit analysis, macroeconomic analysis, duration management, yield curve positioning, and roll-down strategies, as well as derivatives and risk management tools. All of these extra tools and research allow active managers to not look anything like the Agg or other bond benchmarks. And with that, they can beat the bond market consistently.
The win is that ETFs have unlocked and enhanced all those benefits. As we said in the opening, lower fees and lower tax potential have driven the extra return potential of active management into the stratosphere. Bond investing is often a game of inches; a few extra basis points of yield can make all the difference. With lower costs associated with active ETFs over mutual funds, investors get all the extra ‘oomph’ that an active manager in the bond space can deliver. Yes, those attributes help active stock pickers. But when you’re already outperforming, as with bonds, you get even higher returns. By using the structure, investors can reap all the benefits.
Go Active With Your Bonds
For investors and advisors constructing portfolios, the continued divide between active stock and active bond management makes one thing clear. You need to be active with your bond holdings. Or at least use an active bond ETF in concert with a broader index fund. There’s real outperformance there, and investors can get market-beating returns in their portfolios.
As for equities, broad large-cap exposure from active ETFs may not pan out. That doesn’t mean that segments of the market—such as value, dividends, small-caps, or international stocks—won’t outperform when using active. What it means is if you’re looking to own the S&P, you might as well buy the S&P and save the active ETFs for more inefficient slices of the market.
Active Bond ETFs
These ETFs were selected based on their low-cost exposure to active bond management. They are sorted by their YTD total return, which ranges from -0.2% to 3.6%. They have expenses between 0.18% and 0.71% and assets between $243M and $31B. They are currently yielding between 4.2% and 8%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| BOND | PIMCO Active Bond ETF | $5.5B | 3.6% | 5.0% | 0.71% | ETF | Yes |
| FIXD | First Trust TCW Opportunistic Fixed Income ETF | $4.3B | 3.4% | 4.2% | 0.65% | ETF | Yes |
| TOTL | SPDR DoubleLine Total Return Tactical ETF | $3.5B | 3.4% | 5.1% | 0.55% | ETF | Yes |
| FBND | Fidelity Total Bond ETF | $18.1B | 3.2% | 5% | 0.36% | ETF | Yes |
| DBND | DoubleLine Opportunistic Bond ETF | $413M | 3.1% | 5% | 0.45% | ETF | Yes |
| DFCF | Dimensional Core Fixed Income ETF | $243M | 2.9% | 4.5% | 0.19% | ETF | Yes |
| FLXR | TCW Flexible Income ETF | $860M | 2.9% | 5.8% | 0.40% | ETF | Yes |
| JPIE | JPMorgan Income ETF | $2.97B | 2.8% | 5.6% | 0.40% | ETF | Yes |
| JPST | JPMorgan Ultra Short Income ETF | $30.7B | 2% | 4.6% | 0.18% | ETF | Yes |
| BINC | BlackRock Flexible Income ETF | $8.14B | 1.9% | 5.4% | 0.52% | ETF | Yes |
| MINT | PIMCO Enhanced Short Maturity Active ETF | $12.8B | 1.7% | 4.8% | 0.35% | ETF | Yes |
| CGMS | Capital Group U.S. Multi-Sector Income ETF | $2.44B | 1.1% | 6.1% | 0.39% | ETF | Yes |
| SRLN | SPDR Blackstone Senior Loan ETF | $9.5B | -0.2% | 8.0% | 0.70% | ETF | Yes |
Overall, active ETFs have leveled the playing field and have enhanced active management and outperformance. But when it comes to large-cap equities, there is still a bit of a struggle. Market efficiencies have continued to make this segment of the market difficult for active managers to win out. But for bonds, the opposite is true. Outperformance abounds. To that end, investors should focus their active ETF efforts on the bond side and equity segments with large disparities that can be exploited.
The Bottom Line
Active ETFs are great, but they aren’t even in their outperformance. Large-cap equities still struggle when bonds beat indexes. For investors, the choice is clear on how they should position themselves and their portfolios.
1 S&P (October 2024). SPIVA® Global Mid-Year 2024
2 Fidelity (February 2025). Why active management may be better for bond funds
