Why do fixed income ETFs underperform their benchmarks?

Mike Reed, Head of Global Financial Institutions, looks at why active management – as opposed to investing through passive fixed income ETFs – is the optimal way to access the asset class.

Key points:

• ETFs exist across many asset classes and have been widely adopted by institutional investors. However, we do not believe they are the best solution for fixed income investors.
• Bond markets are generally less efficient than equities. They are more prone to the mispricing of risk, which creates opportunities for active managers.
• Transaction costs and fees mean passive fixed income ETFs lag benchmark returns; this tends to be exacerbated during volatile periods when liquidity decreases.
• Bond markets have idiosyncrasies that allow active managers to generate outperformance, after fees, whereas passive ETFs have consistently delivered net returns that lag their benchmarks.

Find out more here