Demand for Active-Bond ETFs is at an All Time High. Did Vanguard’s Fee Cuts Include Such Funds?

Investors showed a strong preference for actively managed bond exchange-traded funds (ETFs) in January, pouring in a record $17 billion, according to Matthew Bartolini, head of Americas ETF research at State Street Global Advisors. This surge highlights growing investor interest in strategies aimed at outperforming traditional benchmarks, especially in a climate of heightened rate volatility and tight credit spreads.

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Overall, bond ETFs saw impressive inflows of $37 billion, marking their second-highest monthly total ever, as investors sought greater exposure to riskier credit assets.

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Bartolini noted that actively managed bond strategies have delivered solid performance trends, positioning them well to navigate the current market environment. With interest rates fluctuating and corporate bond spreads remaining historically tight, active managers are seen as better equipped to manage risks compared to their passive counterparts. While index-tracking bond ETFs remain popular for their low-cost exposure to core fixed-income assets, more investors are now turning to active funds despite their higher fees, hoping for superior returns.

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Vanguard, one of the major players in the ETF space, recently announced widespread fee reductions across many of its funds, including bond ETFs. However, these cuts did not extend to its actively managed bond ETFs. Aniket Ullal, head of ETF research and analytics at CFRA Research, pointed out that none of Vanguard’s active fixed-income ETFs benefited from the recent fee reductions. This is partly because Vanguard’s active bond ETFs are relatively small compared to its vast portfolio of passively managed funds.

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A spokesperson for Vanguard emphasized that their active fixed-income ETFs already have low expense ratios, averaging just 10.5 basis points—among the lowest in the industry. This cost-efficiency aligns with Vanguard’s mission to help investors retain more of their returns. For comparison, Vanguard’s index fixed-income ETFs boast an even lower average expense ratio of just 3.7 basis points.

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not cutting fees on active bond ETFs, Vanguard continues to expand its offerings, announcing plans to launch the Vanguard Short Duration Bond ETF (VSDB) in early April.

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While Vanguard focuses on cost efficiency, BlackRock remains a formidable competitor in the bond ETF market, both in terms of assets under management and the breadth of its offerings. Steve Laipply, BlackRock’s global co-head of iShares fixed income ETF, reported that the firm had a “really strong January,” attracting around $13 billion in inflows across its U.S.-listed bond ETFs.

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The iShares 0-3 Month Treasury Bond ETF (SGOV) led the charge, pulling in approximately $3 billion as investors favored shorter-duration bonds to mitigate long-term interest rate volatility.

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BlackRock’s active fixed-income strategy includes targeting “plus sector” opportunities beyond traditional investment-grade bonds. The iShares Flexible Income Active ETF (BINC), for instance, has the flexibility to invest across global bond markets, including mortgages, collateralized loan obligations (CLOs), high-yield debt, and investment-grade credit.

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This flexibility paid off in 2024, with BINC returning an impressive 5.8%, significantly outperforming index-tracking peers like the iShares Core U.S. Aggregate Bond ETF (AGG) and Vanguard Total Bond ETF (BND), both of which posted gains slightly over 1% for the year.

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In comparison, Vanguard’s Core Plus Bond ETF (VPLS), launched in late 2023, delivered a more modest return of 2.7% in 2024. Despite having a lower expense ratio of 0.2% and over $350 million in assets under management, VPLS couldn’t match BINC’s performance. BINC’s higher fee of 0.52% is partially offset by a fee waiver in place through mid-2026, reducing its net expense ratio to 0.4%. As of early February, the fund had amassed over $7.5 billion in assets.

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Investors’ appetite for CLO exposure also hit new highs in January, with $7.5 billion flowing into ETFs holding leveraged loans and CLOs. CLOs, which purchase leveraged loans, have become increasingly popular among yield-seeking investors. BlackRock capitalized on this trend by launching the actively managed iShares BBB-B CLO Active ETF (BCLO), targeting CLO tranches rated BBB+ to B-. This followed the early 2024 debut of the iShares AAA CLO Active ETF (CLOA), which focuses on the safest segments of the CLO market.

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Janus Henderson’s actively managed AAA CLO ETF (JAAA) also delivered strong results, returning 7.4% in 2024, according to FactSet data. This performance underscores the potential benefits of active management in specialized fixed-income sectors, where skilled managers can identify attractive opportunities that passive strategies might overlook.

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Despite the strong performance of many active bond ETFs, Ullal cautioned that paying higher fees for active management doesn’t always guarantee market-beating returns. While the theory suggests that investors should be willing to pay more for the potential of outperformance, actual results can vary widely depending on the manager’s skill and market conditions.

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As investors continue to navigate a complex fixed-income landscape, the shift toward actively managed bond ETFs reflects a desire for greater flexibility and the potential for enhanced returns. With firms like Vanguard and BlackRock expanding their active offerings, competition in this space is likely to intensify, offering investors a broader array of choices to meet their evolving needs.

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