In 2023, the surge in active fixed income ETFs, marked by significant inflows and new launches, captured the market’s attention. Reasons driving interest in this category include the potential for outperformance, reduced volatility, and enhanced diversification. Ford O’Neil, a fixed income portfolio manager at Fidelity Investments, has a strong conviction in the structural underpinnings behind the recent success of the asset class, and anticipates its continued growth.
Intelligent Indexing: Paving the Way for Outperformance
According to O’Neil, active fixed income presents a greater potential for outperformance compared to equities. This is because bond indices only cover around half of the total bond market. In contrast, equity indices encompass a much larger share of the entire stock market. As a result, the bond market is less efficient, fostering more undervalued securities, offering active fixed income managers opportunities for alpha generation.
Navigating the Uncertain Landscape
In the current uncertain economic and monetary policy landscape, active managers are better positioned to navigate the intricacies of the bond market. O’Neil highlights the strong outperformance of active fixed income ETFs compared to passive fixed income ETFs over the past eight years. This underscores the potential of active management to capitalize on market inefficiencies and deliver value to investors.
Research-Backed Approach
O’Neil emphasizes the critical role of fundamental research and quantitative analysis in identifying these opportunities. He co-manages several active fixed income ETFs, including the Fidelity Total Bond ETF (FBND) and the Fidelity High Yield Factor ETF (FDHY). These actively managed ETFs strive to leverage meticulous research and effective implementation to uncover value in the bond market.
- bonds
- ETFs
- fixed income
- active etfs
- active management
- Fidelity
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
