The Bigger Picture: What's the Real Price of a Low-Cost Bond Fund?
Rising bond yields have attracted investors seeking a diversified investment portfolio. Some have opted for passive, index-tracking strategies due to the low operating expenses. However, low fees come at a cost.
Key takeaways
- Passive strategies sacrifice the opportunity to outperform fixed income benchmarks. After fees, they underperform the benchmark.
- Global bond markets are inherently inefficient, leaving investors in passive strategies at a disadvantage.
- Passive strategies take index allocation as it is, without opportunity to take advantage of higher-paying bonds, for example, or to minimize exposure to tail events.
- Active managers with proven fundamental credit research and a robust relative-value decision framework have the potential to outperform throughout the market cycle.
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