With the Federal Reserve widely expected to cut rates by 0.25% at its September 16 meeting, attention is turning to where investors can find value in fixed income. Many default to the iShares Core U.S. Aggregate Bond ETF (AGG), which tracks the Bloomberg U.S. Aggregate Bond Index. But just as the S&P 500 captures only part of the equity universe, AGG represents a narrow slice of the bond market, often leaving higher-yielding and diversifying opportunities on the table.
The Limits Of The Barclays Bloomberg Aggregate Bond Index
The Bloomberg U.S. Aggregate includes only about half of the $58 trillion U.S. bond market. It includes primarily U.S. government bonds, agency mortgage-backed securities, and investment-grade corporates. It excludes inflation bonds, high-yield bonds, non-agency MBS, municipal bonds, most asset-backed securities, commercial mortgage-backed debt, and leveraged loans.
These omitted sectors often provide additional yield, cyclical diversification, and enhanced returns. The best way to access them is through an activly-managed ETF.
Why Active Management Matters
Passive bond investing differs from equities. While stock indexes reward successful companies with larger weightings, most bond indexes reward the heaviest borrowers, regardless of credit quality. Passive investors, therefore, risk concentrated exposure to the most indebted issuers.
Active, multi-sector managers can instead rotate across all segments of the fixed income market, capturing relative value and adjusting duration to the macro cycle. Active managers attempt to limit credit exposure when credit spreads are tight and reduce interest rate sensitivity when interest rates are rising. It’s very difficult for the average retail investor to move between these more opaque sectors of the bond market.
Evidence supports this tactical, opportunistic approach. Morningstar data shows nearly 80% of core-plus active bond managers beat their benchmark in 2024, compared with SPGlobal data that suggests only 35% of active equity managers.
What’s Inside A Typical Active Bond Fund?
BlackRock’s iShares Flexible Income Active ETF, ticker BINC, is a good example of a go-anywhere bond fund. The largest go-anywhere bond ETF, run by a candidate for the next FOMC Chair, Rick Rieder, demonstrates how a flexible mandate can deliver results.
Unlike AGG, BINC maintains virtually no exposure to U.S. Treasuries. Instead, the fund hold positions in non-U.S. corporate bonds (22%), high yield credit (17%), non-agency mortgage bonds (10%) and commercial mortgages (10%). None of these segments are represented in the popular passive indexes.
Including these higher-yielding bond market segments helps BINC generate more yield with less market volatility. Here are some stats: Over the past year, the $12 billion ETF returned 6.58% versus 2.84% for AGG. Compared to AGG, BINC has a higher SEC yield (5.2% vs. 4.2%), lower volaility (2.9% vs. 5.1%) and a lower interest rate sensitivty (effective duration of 4.3 years vs. 5.9 years).
BINC is not the only multi-sector bond fund available to investors. Other alternatives include the PIMCO Multi-Sector Bond ETF (PYLD), the JP Morgan Income ETF (JPIE), and the Columbia Needle Diversified Fixed Income Allocation ETF (DIAL). These funds have outperformed AGG over the last year, despite their higher net management fees, and have heavy allocations to segments of the bond universe that are not present in AGG.
Understanding Multi-Sector Bond Risks
Go-anywhere funds carry risks. Exposure to less liquid, higher-yielding instruments like Collateral Loan Obligations (CLOs), bank loans, or emerging market debt can amplify drawdowns in market stress. Portfolios tilted toward high-yield may behave more like equities during times of crisis. However, across complete cycles, multi-sector bond funds have demonstrated the ability to deliver higher income and stronger returns than their passive index counterparts.
Passive Isn’t Always The Best Choice
In equities, market-cap weighting rewards growth and success. In bonds, it rewards leverage. Investors who confine themselves to the broad, passive bond indexes risk missing higher yield and diversification available in the less liquid, less transparent corners of the fixed income market. With the Fed expected to begin easing monetary policy this week, using an active bond manager could generate additional opportunistic return in what some investors consider the boring part of their portfolio.
Most allocators would not limit equity exposure to the S&P 500. They reconize there are pockets of value in international markets, small-cap stocks and in private companies. Similarly, relying solely on passive bond allocations is sub-optimal. For investors seeking income, diversification, and total return, active multi-sector ETFs offer a compelling alternative or addition to traditional bond exposure.