The allocation into fixed income isn’t just happening on a retail level. Increasingly, more allocation is happening with asset managers, including heightened interest in active management.
According to Pensions & Investments, money manager Capital Group conducted a 300-participant survey for institutional investors worldwide. The results revealed plans to increase allocations into fixed income across all sectors. Close to half cited decreased stock-bond correlation over the next year as a reason. This indicates increased faith in bonds as a ballast against market shocks and as a portfolio diversifier.
One specific area that institutional financiers may be looking at is the trend of rising active funds.
The Allure of Active Management
The same survey respondents indicated that they would increase their allocation to active fixed income strategies. Only 5% had plans to reduce exposure. With market uncertainty fueled by macroeconomic and geopolitical factors, institutional managers are looking to active management as a flexible, pliable option.
“The benefit of having an active approach to fixed income is that you can much more nimbly navigate this environment going forward. For us, the energy sector is an area that we would prefer to avoid given weaker oil prices. So as an active manager, you have the ability to do that,” said Edward Harrold, an investment director at Capital Group.
For retail investors, Vanguard has a triage of options: a core fund for all-encompassing bond exposure, one that tilts towards municipal bonds, and another that offers a multi-income approach. All three feature cost-effective solutions that can easily slot into any fixed income portfolio.
An Active Core Option
The Vanguard Core Bond ETF (VCRB) is for investors who want broad bond exposure and active management in a cost-effective ETF wrapper. Its expense ratio comes in at a paltry 0.10%. Using its active management strategy under the Vanguard Fixed Income Group, VCRB mitigates credit risk via diversified exposure to the U.S. investment-grade bond market.
For maximizing yield opportunities, the fund also expands its exposure to other fixed income assets. That includes mortgage-backed securities and corporate securities for added yield. That said, its 30-day SEC yield is 4.62%, as of August 11.
Active Exposure in Munis
With a combination of credit quality and yield, municipal bonds have been capturing the attention of fixed income investors as of late. With that, an active option worthy of consideration is the Vanguard Core Tax-Exempt Bond ETF (VCRM). Again, VCRM is a cost-effective solution for those seeking an active muni option with an expense ratio of 0.12%.
VCRM includes muni debt from U.S. states and local governments or agencies whose interest is exempt from federal income taxes and the federal alternative minimum tax. As of June 30, 90% of the fund’s holdings are investment-grade with an average stated maturity of about 14.8 years and an average duration of half that. Additionally, the fund’s 30-day yield is just over 4%.
A Multi-Income Approach
With more investors seeking further flexibility in today’s complex macroeconomic environment, a diversified multi-income approach can be beneficial. With that, the latest active offering from Vanguard: the Vanguard Multi-Sector Income Bond ETF (VGMS) is ideal.
The potential of rate cuts could add to the wall of worry for fixed income investors who are already dealing with enough market uncertainty to begin with. When you add falling rates that could diminish yield returns, a diversified income approach is imperative. That said, investors and advisors must be able to locate opportunities from a plethora of options available. VGMS makes it much easier in the convenience of an ETF wrapper.
Whether it’s corporate bonds, international bonds, or other fixed income assets to find max yield opportunities, VGMS looks at it all. Active management further allows portfolio managers to not only identify these opportunities, but to respond to changing market conditions when necessary. VGMS has an expense ratio of 0.30%, which is still less than half of the FactSet segment average. It boasts the highest yield of the three with a 30-day SEC yield of 5.51% as of August 11.
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