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Active ETFs Remain the Place for Fixed Income

The growth of active ETFs has been staggering over the last year or so. As financial professionals and retail investors realize the advantages active strategies have in an ETF vehicle, the number of funds and assets under management have exploded. However, that growth and demand hasn’t been equal. Some asset classes continue to be preferred in an active ETF wrapper.

In this case, we’re talking about fixed income products.

Assets in fixed income active ETFs continue to be favored by investors over equity products, while many of the new fund launches continue to be in the asset class. With this recent spat of activity building upon fixed income’s already impressive wins in the space, active ETFs clearly remain the place for investors in bonds and other fixed income assets.

See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.

AllianceBernstein Launches Funds

With nearly $700 billion in assets, AllianceBernstein is no slouch in the investment management space. But like many old school managers, the group was lacking a presence in the ETF market. That has recently changed with the firm’s announcement that it has filed and launched two new funds. And like many of its investment manager rivals, these new ETFs fit a certain mold.

They are actively managed and focus on fixed income/bond investing.

AllianceBernstein recently filed the AB Ultra Short Income ETF and the AB Tax-Aware Short Duration ETF with regulators. The ETFs will focus on the shorter maturity/duration scale of the bond spectrum and seek to find a balance between stability and yield. The tax-aware fund will have an eye toward reducing taxes for regular brokerage accounts.

While it remains to see if the funds will be hits with investors and advisors, AllianceBernstein’s filing follows many rivals in fixed income products. Top fund shops like Federated, T. Rowe Price, Capital Group, and J.P. Morgan have all launched new fixed income active ETFs in recent weeks. According to Morningstar, 65 of the 105 new fixed income ETFs launched since 2021 have been actively managed. Actively managed fixed income ETFS are growing at a 43% pace, roughly twice the rate of passive fixed income ETFs.

Advisors and Investors Like Them Too

The proliferation of fixed income products has found plenty of fans as well. It seems that investors—both retail and institutional—as well as advisors have flocked to these new fixed income products in spades. According to EPFR data, net flows into actively managed bond ETFs last year were the largest on record. All in all, active bond ETFs had $26.5 billion of net flows in 2021. While that’s about a fifth of what passive fixed income products took in, it’s still far better than active equity ETFs saw during the year.

Moreover, fund flows for 2022 have supported this as well. Excluding the several high-profile mutual fund-to-ETF conversions from J.P. Morgan and DFA, active fixed income ETFs have still managed to score higher net inflows than their active equity counterparts.

The reason for the surge in inflows comes down to returns.

There’s plenty of data that supports that active management makes a difference on the fixed income side of the equation, especially in highly-volatile and rising rate environments like today. Morningstar’s latest Active/Passive Barometer showed that active fixed income managers’ success rate was stellar in 2021. Overall, 70% of active fixed income managers beat their passive benchmarks. The key was that active managers were able to take less interest rate risk than their passive peers and, therefore, lose less money as rates started to rise.

Investors responded accordingly to this data and active’s ability to not look like a benchmark.

Check out our Fixed Income Channel to learn more.

The Perpetual Motion Machine Action

So, on the one hand, we have plenty of new active fixed income products being launched. On the other, investors have been clamoring and moving portfolios into such ETFs. And those inflows spur Wall Street to launch more. Rinse and repeat.

What all this does is underscore that active ETF vehicles are increasingly becoming the place for fixed income investors. Growth remains swift and we could see the active space subjugated by bond funds. That’s not necessarily a bad thing. Active management has already proven itself in rising rate environments via outperformance, while lower costs of ownership, higher yields, and tax savings are all wins for the ETF structure.

As such, fixed income is already pulling away as the preferred asset class when it comes to active ETFs. Investors should expect more launches and the active ETF conversation to be dominated by bond/fixed income investments.

Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.

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May 17, 2022