Is your fixed income allocation prepared for 2025? The opportunity present in fixed income has widened over the course of 2024. Adapting to that trend may require a shift in fixed income portfolios. Many investors rely heavily on passive, bond aggregate index-tracking funds in their fixed income sleeves, whether for income or yield. While straightforward, that strategy may miss expanded opportunities in bonds in the new year.
Consider, for example, how the Bloomberg Aggregate Bond Index, or the Agg, invests. A key benchmark for bonds, the Agg tracks over $50 trillion in fixed income securities, per Investopedia. The Agg includes U.S. government Treasury securities, U.S. municipal bonds, corporate bonds, and mortgage- and asset-backed securities.
While that offers a representative view into the U.S. fixed income landscape, it tends to focus more heavily on certain areas, such as Treasuries. According to YCharts data as of December 18th, the Agg had returned 2.25% over the last year. That’s steady performance, but an active multisector income ETF might provide more income for a few reasons.
First of all, an active approach can scrutinize bond issuers more closely than a passive fund can. Passive funds, on the other hand, often must include certain firms to meet index construction guidelines. At the same time, with the main goal of tracking an index, making judgement calls about a given issuer’s credit quality may take a backseat.
Active managers can also bring their own experience and prowess to fixed income with that greater degree of flexibility. The world of bonds has plenty of particularities and quirks that seasoned managers come to understand. Those managers can offer added value.
An active multisector bond ETF can invest across a greater number of categories, with the freedom to go after the strongest sources of income. While certain risky categories of the fixed income market may have a limited weight in the Agg, with the Agg only including fixed income securities of at least investment-grade quality., an active multisector bond ETF can invest there if it makes sense to do so in looking for strong sources of income.
Given the changing picture of fixed income in 2025, a strategy like that could make for a worthwhile addition to investor portfolios. Globally, interest rates have dropped significantly through 2024, but 2025 may see a slower pace for rate cuts. There are even possible scenarios in which inflation rises once more, and a rate hike occurs. The live rate market has reinvigorated multiple bond categories, which in turn, makes an adaptable multisector fund a potent option for those seeking more current income.
The Capital Group Multi-Sector Income Select ETFTM (Canada) (CAPM) offers an example of an active multisector income ETF. Launched in October 2024, the ETF aims to provide a “high level of current income” via a broad range of bonds and debt securities, according to Capital Group Canada. Specifically, CAPM combines four, global credit sectors into a single portfolio: investment-grade corporates, high-yield corporates, emerging markets bonds, and securitized debt.
Together, that presents one option for those looking to get active fixed income from multiple sources to boost their portfolios’ overall current income. For those preparing for a 2025 bond exposure refresh, a fund like CAPM can hold some appeal.