Are advisors missing the opportunity in active fixed-income ETFs?

A recent survey conducted by Capital Group points to a significant gap in understanding the advantages of active fixed-income ETFs among financial professionals, highlighting an opportunity for education and increased adoption in the sector.

The survey, which drew responses from 400 financial professionals, found they are investing less than 4% of managed assets in active fixed-income exchange-traded funds, despite a notable rise in demand for both active ETFs and active fixed-income mutual funds.

“Only 12% of fixed-income ETF assets are active, compared to 78% of fixed income mutual fund assets,” Holly Framsted, Capital Group’s head of global product strategy and development, said in a statement.

Many respondents acknowledged their limited familiarity with the unique benefits of active fixed-income ETFs, including the potential for consistent returns, their role as a foundational element in a diversified portfolio, and comparatively low fees.

Travis Spence, J.P. Morgan Asset Management’s head of ETF distribution in EMEA, also recently spoke in favor of active fixed-income ETFs, citing their ability to “allocate towards higher-quality issuers and away from those issuers at risk of downgrades.”

Framsted suggested that the underutilization of active fixed-income ETFs may be a result of this lack of understanding, which she said was “unsurprising” given their recent introduction in the market.

Less than half of the respondents to Capital Group’s survey said they feel very confident in their ability to incorporate active fixed-income ETFs into client portfolios. In contrast, seven in 10 said they were well-versed in the use of active fixed-income mutual funds.

Drilling deeper into the data, the survey found financial professionals at wirehouses were the least likely to say they’re familiar with active fixed-income ETFs, which could be the primary reason why they put the smallest share of their assets in the products.

The survey also showed a potential bias in fee perceptions. While nearly half of survey respondents believed passive equity ETFs were likely to have more attractive management fees compared to other ETFs, only 4 percent had the same convictions about active fixed-income ETFs.

Tellingly, younger advisors seemed more likely to be on the forefront of adoption, as financial professionals in the 30-39 age bracket were more likely to self-report as knowledgeable about active fixed-income ETFs than their older counterparts.

“As awareness of these benefits grows and cash comes off the sidelines in 2024, we think it is a matter of time until the gap between active and passive fixed-income ETFs closes,” Framsted said. “It’s a matter of ‘when’ and not ‘if,’ and financial professionals would do well to be prepared to speak to clients about the role active fixed-income ETFs can play in their portfolios."