A new year means a new opportunity to refresh portfolios, all the way down to core allocations. For many investors, core allocations means finding a simple, passive fund. 2024, however, may inspire investors to instead consider an active core bond approach, instead. Active fixed income offers some real advantages compared to passive, with active especially impactful for bonds compared to equities. With the rate environment continuing to shift, now could be the time for an active approach therein.
Passive fixed income funds may try to replicate an index’s bond allocations, but doing so is very difficult. With varying expiration dates, bonds getting called, and changing interest rates, the adaptability provided by active funds can deliver better outcomes than passive bond funds. That’s where so-called core-plus bond strategies come in.
An active core=plus bond fund provides a strong active fixed income ETF option. The JPMorgan Core Plus Bond ETF (JCPB), for example, could be a viable choice for those wanting to move on from a passive core bond allocation. Charging 38 basis points (bps), JCPB actively invests in U.S. and non-U.S. debt. The fund primarily targets investment-grade debt, capping high yield debt to 35% of its portfolio. Additionally, it caps non-U.S. debt at 35%.
JCPB’s foreign allocation is also where active management can shine within the fund's portfolio. Active fixed income managers can bring their experience, knowledge of different markets, and close scrutiny of firms’ credit quality to bear when investing abroad. That can help outperform that meet their foreign bond target requirements by simply identifying the obvious options.
Active's Close Scrutiny Helps With Taxes, Too
However, a fund that specifically focuses on non-U.S. debt like the JPMorgan International Bond Opportunities ETF (JPIB), for example, can provide entirely foreign exposure with a level of independence and flexibility that cannot be achieved with a passively managed fund. JPIB charges 50 bps and targets both emerging and developed markets.
Finally, the close scrutiny provided by active managers can help with tax issues, too. Tax-exempt muni bonds can help portfolios deal with costs, especially important for those nearing retirement. And the expert knowledge and research of fund managers regarding the issuers and the projects associated with the bonds can allow the managers to make better choices for the portfolio rather than having to invest according to an underlying index. The active JPMorgan Municipal ETF (JMUB), charges just 18 bps to seek out tax-free income via investment grade municipal bonds.
