Passive Works With Bond ETFs, Too

Recent data indicate 2015 is shaping to be another rough year for active mangers of equity funds. As Benzinga noted last week, for the 12 months ended July 31, nearly two-thirds of active large-cap managers failed to beat their benchmark, according to S&P Dow Jones Indices. The good news (sort of) for active managers and the investors that stick with this methodology is that the 65.3 percent failure rate of large-cap managers for the year ended July 31 is better than five- and 10-year laggard rates of 81 percent and 80 percent, respectively. 

Active small-cap managers are struggling to beat their benchmarks, too, and the performances turned in by active mid-cap managers are merely less bad and nothing to brag about. Underscoring the utility of fixed income exchange traded funds and perhaps why this asset class continues to swell in size are the struggles of some active bond managers.

Though there are some standouts among actively managed bond funds, including some new ETFs, fixed income is a veritable wasteland of slack performance by active managers. Over the past decade, 93 percent of managers running active long-term government bond funds lagged their benchmarks while just 7 percent of active junk bond managers beat their benchmarks, according to S&P data.

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“However, according to S&P Dow Jones Index Versus Active (SPIVA) research, in the one-year period ended June 2015, the average active mutual fund in nine of the ten tracked active fixed income styles lagged the respective Barclays index. Though 69% of the global income mutual funds outperformed, this style was the lone outlier,” said S&P Capital IQ in a note out Tuesday.

Total Return

Through the first eight months of 2015, investors poured $37 billion into fixed income ETFs, with the bulk of the top asset-gathering funds being passively managed. To be fair, some actively managed bond ETFs are shining with the SPDR DoubleLine Total Return Tactical ETF TOTL being a prime example.

TOTL is bond king Jeff Gundlach's first foray into ETFs and the actively managed fund has been an undisputed success, outperforming rival funds on its way to amassing nearly $1.1 billion in assets since its February debut.

Still, the odds of picking winning actively managed bond funds are low, particularly when it comes active government bond funds.

“Meanwhile, a shockingly low 1.2% of government long funds outperformed the Barclays Long Government index and only 15% outperformed when looking back to five years,” notes S&P Capital IQ.

The research firm highlighted the passively managed SPDR Barclays Long Term Treasury ETF TLO as an option for investors looking for cost-effective exposure to longer-dated Treasurys. The $246.8 million TLO charges just 0.1 percent per year with a 2.8 percent 30-day SEC yield and has a duration of approximately 17 years.

Data suggest investors should be careful with actively managed emerging markets bond funds, most of which lag their benchmarks and many of which carry hefty fees.

“Only 10% of emerging market debt and 42% of mortgage-backed securities funds outperformed the outperformed the Barclays Emerging Markets and Mortgage-Backed Securities indices in the one-year period. Underperformance in emerging markets has persisted throughout the SPIVA study, with just 6% and 3% of all funds have success in the recent three- and five-year periods. Considering the Lipper average emerging market hard currency debt fund has a hefty 1.23% expense ratio that eats into returns, this should not be too surprising.,” said S&P Capital IQ.

The iShares J.P. Morgan USD Emerging Markets Bond ETF EMB and the PowerShares Emerging Markets Sovereign Debt Portfolio PCY, two of the largest emerging markets bond ETFs, charge 0.4 percent and 0.5 percent per year, respectively.

Five of the top 10 asset-gathering ETFs to this point in the third quarter are passively managed bond funds.