3 Active Bond Options as Asset Management Interest Heightens

A Capital Group survey reveals institutional investors globally are increasing fixed income allocations, particularly towards active management strategies, driven by expectations of decreased stock-bond correlation and the need for flexible portfolio diversification and market shock ballast in uncertain macroeconomic and geopolitical environments. This shift underscores a preference for active approaches to nimbly navigate market conditions and optimize yield. The trend is exemplified by offerings like Vanguard's new active fixed income ETFs (VCRB, VCRM, VGMS), which provide cost-effective solutions for core, municipal, and multi-sector exposure, with yields up to 5.51%.

Analysis

A recent Capital Group survey of 300 institutional investors reveals a significant strategic shift towards increased allocations in fixed income, with a pronounced preference for active management. This trend is underpinned by the belief, held by nearly half of the respondents, that a decreasing stock-bond correlation will restore bonds' efficacy as a portfolio ballast against market shocks. Only 5% of surveyed managers plan to reduce exposure to active fixed income, viewing it as a flexible tool to navigate macroeconomic and geopolitical uncertainty. This is exemplified by the ability of active managers to dynamically avoid specific risks, such as underweighting the energy sector amid weaker oil prices. The market is responding to this demand with cost-effective products, such as Vanguard's new suite of active ETFs. These include the Vanguard Core Bond ETF (VCRB) with a 0.10% expense ratio and a 4.62% 30-day SEC yield, the tax-advantaged Vanguard Core Tax-Exempt Bond ETF (VCRM) yielding just over 4%, and the Vanguard Multi-Sector Income Bond ETF (VGMS), which offers the highest yield of the group at 5.51% and an expense ratio of 0.30%, still less than half its segment average.

Key Decisions for Investors

• Investors should consider mirroring the institutional shift by increasing allocations to actively managed fixed income funds to enhance portfolio diversification, particularly as the traditional negative correlation between stocks and bonds is expected to return.
• For those seeking to navigate macroeconomic uncertainty, actively managed funds offer the flexibility to dynamically adjust sector exposures, such as avoiding energy sector debt amid weaker oil prices, which is a key advantage over passive index-tracking funds.
• Depending on specific objectives, investors can select from cost-effective active ETFs like VCRM for tax-exempt income, VCRB for core investment-grade exposure, or the higher-yielding VGMS (5.51% 30-day SEC yield) for a diversified, multi-sector income approach.