Following a rout in March and then a well-publicized rally in credit markets, combined with unprecedented inflows into fixed income ETFs, this seems like a good opportunity to evaluate the recent performance of Active Fixed Income ETFs.
To set the backdrop for this study, Actively managed ETFs make up a tiny percentage of the ETF landscape. This has a lot to do with SEC rules, and not necessarily manager preference, but that is a topic for a separate discussion. While the entire US ETF universe is $4.9 Trillion in assets, only $131 Billion (2.7%) is managed actively (with the goal of outperforming its benchmark). This split is reversed in the Mutual Fund world, where out of $18 Trillion in assets (non money market), only 24% is classified as Passively Managed.
What is also interesting to point out is that Fixed Income has taken the early lead in Actively managed ETFs (9% of total) compared to equity ETFs (<1% active). However, this is likely to change with the Dec 2019 approval of equity ETF structures that are not required to disclose precise daily holdings, and the subsequent launch of active equity ETFs from a number of issuers in the past few months.
Table 1: While the overall size of the active ETF universe is small at $130 B, fixed income has led the charge; the share of Active vs. Passive is flipped in mutual funds, though has been narrowing as index mutual funds gain share.
To drill into this further, of the $90 Billion in Active Fixed Income ETF, more than 60% is concentrated in “Ultrashort” funds – funds that typically buy short-dated or floating rate securities, often structured debt, with the goal of enhancing yield but avoiding interest rate risk and minimizing credit risk.
Table 2: A breakdown of the Active Fixed Income ETF universe (categories with 2+ funds shown). So far, the majority of the $90 B is invested in Ultrashort funds.
Given the table above, I hope you can appreciate the difficulty in comparing performance across these different fund groups. For example, it is illogical to compare the returns of an ultrashort portfolio with an Agg, Muni or HY bond portfolio; they have wholly different objectives and constraints. While most active equity funds can be compared to broad market benchmarks such as the Russell 3000 or some clearly-defined subsets, fixed income funds have hidden impacts such as duration, yield curve positioning, or credit sector exposure, which may or may not be related to the portfolio manager’s Active decisions.
Table 3: Not to mention the fact that “official” listed benchmarks are all over the map even for funds within the same category!
For these myriad reasons, I have opted to use the largest Passive ETFs as our benchmarks. One – because they usually perform very close to their underlying indices, and Two – that’s really what we as investors want to know anyway- where would we have done better? Further, I restrict my analysis to the four groups of funds that make up 93% of the Fixed Income active ETF universe.
Table 4: [ ADDED SEP. 8, 2020] While there are nearly 30 issuers in the Active Fixed Income ETF space, the top 10 are shown here. It is nice to see a different list and lower concentration when compared to the overall ETF industry.
So, (you groan) – Get to the Point! Did the funds outperform their Beta Brethren?
The 22 funds in this, by far the largest group, returned an average +2.3% for the one-year period. Performance ranged from +0.8% to +5.0%. In comparison, an ETF of 1-3 month T-Bills returned +1.0%, 1-12 month T-Bills returned +1.5%, while a fund of short corporate bonds was up +4.4%. Winner: FLTB +5.2%.
The 17 funds in this category, usually without strict duration or sector constraints, are typically striving to outperform the Agg or similar broad US bond index. These funds in total returned 6.1% over the past year, slightly below the 6.5% return of iShares AGG. Performance in this group varied widely, from 3.1% to 9.5%, Winner: WBND +9.5%:
An important category with over $3.5 B in assets, the set of eight active Muni ETFs returned +2.1% for the past year, slightly below their index peers. Winner: MMIN +5.0%.
HIGH YIELD BOND
With six funds in the active category, this group handily beat the passive portfolios, with a +4.5% one-year return, compared to 3.1-3.9% for the large index funds. Winner: FDHY +9.1%.
INVESTMENT GRADE BOND
With the Fed providing explicit support for underlying bonds and corporate bond ETFs, this was a frothy space the last few months. The four active ETFs in the space returned +8.0% for the last 12 months, compared to +9.2% for LQD, and +7.8% for a broader corporate ETF. Returns were relatively tight around the 8% mark. I show several other index funds as benchmarks to illustrate the difference in performance across the liquidity and maturity spectrum. Winner: FCOR +8.7%.
(All return figures above are through Sep 1, from www.etflogic.io)
While still a nascent category, with few large funds in the space, active ETFs are a fascinating area for innovation and growth, bonds and equities, driven by recent changes in regulation as well as investor preference for the ETF vehicle. This study shows that a number of funds were able to handily beat the benchmarks, especially in the credit space , with Fidelity leading several categories, and the Ultrashort category held up well during the turmoil, providing a significant advantage over treasuries or cash.
Survey of Asset Allocation models: Post (August)
A deep dive of ETF flows through June: Article (June)
Ultrashort funds’ performance through the Covid crisis: Post (May)
An analysis of Fed ETF purchases: Article (May)
Data Notes: I screened for unlevered, unhedged (rates), USD only, ETFs with assets of $100 million or greater as of 31-Aug-2020 and were launched prior to 01-Jan-2020. Bond ETFs $10mm+ comprise 99.5% of the universe. Returns for fund categories above are market-weighted.
Data Sources: ESIC LLC, www.etfdb.com, www.etflogic.io, Investment Company Institute (ICI)
Below is the reference data for all the groupings, funds, and index fund returns used in this study, showing year-to-date and 12-month returns:
Elya Schwartzman is the founder and president of ES Investment Consulting LLC (ESIC LLC), an independent advisory firm specializing in ETFs, indexing, fixed income portfolio management, and investment infrastructure / technology. ESIC also provides independent research on these topics. www.esicllc.com; www.etflogic.io/blog/
Disclaimers: ESIC seeks to, may have previously, currently, or in the future, provide paid advisory services to companies in the ETF ecosystem, including but not limited to issuers, index providers, analytics / data vendors, and market makers.