Six Reasons Investors May Consider Active Fixed Income

These conditions have drawn attention to how fixed income exposure is constructed and managed. While passive strategies can continue to offer broad market access, some investors are considering whether an active approach may provide additional tools to navigate interest-rate sensitivity, credit risk, and shifting opportunities within the bond market. In active management, a portfolio manager (or team) can make ongoing decisions about what to buy, sell, and hold with the goal of beating a specific benchmark.

With that context, the following six points highlight why some investors may be considering active fixed income strategies today.

According to J.P. Morgan Asset Management’s report, The Power of Active Fixed Income ETFs, a majority of active fixed income managers have historically outperformed their benchmarks in certain market segments including high yield bonds, securitized credit and multi-sector fixed income. For example, over the past five years, approximately 80% of core and core-plus managers outperformed the Bloomberg U.S. Aggregate Index, while active core-plus strategies generated an average annualized excess return of 0.9% net of fees.

Compared with large-cap equities, segments of the bond market — such as corporate credit, provincial bonds, and securitized assets — may exhibit lower liquidity and transparency. These characteristics can lead to pricing discrepancies across issuers and maturities.

Passive strategies typically track market-weighted indices and do not always adjust for these inefficiencies. Active managers, by contrast, may be better able to identify relative value between similar bonds, take advantage of liquidity premiums during periods of market stress and may be able to assess issuer fundamentals beyond index construction rules.

Bond prices can be sensitive to changes in interest rates, making rate risk a key consideration for fixed income investors. In Canada, returns may be influenced by Bank of Canada policy decisions, inflation trends, and global rate movements. An active approach may allow managers to adjust duration as interest-rate expectations evolve. On the other hand, passive bond ETFs generally maintain a relatively static interest-rate profile based on index composition, regardless of changing market conditions.

Some fixed income indices are constructed using market-value weighting, where an issuer’s weight is proportional to the amount of debt outstanding. Under this approach, governments or corporations that issue more debt naturally occupy a larger share of the index, which can lead to higher exposure to highly indebted issuers, sectors, or regions.

This consideration can be particularly relevant in the Canadian fixed income market, where government and financial issuers represent a substantial portion of broad bond indices.

Active management may be well positioned in this case because it can account for risks created by index construction, such as higher exposure to heavily indebted issuers or concentrated sectors. By assessing credit fundamentals, diversification, and liquidity, active approaches may seek to manage concentration and issuer-specific risks that market-weighted indices reflect by design rather than by credit quality.

While equity investments can rise substantially in value, bond returns are typically limited to interest payments and the return of principal. When credit conditions deteriorate, however, bond investors can still experience meaningful losses. This imbalance highlights the importance of credit analysis and monitoring. Active fixed income strategies may seek to avoid issuers with weakening fundamentals, adjust exposure ahead of potential downgrades and attempt to balance yield opportunities against default risk.

Passive strategies generally retain downgraded securities until index rebalancing occurs.

Active fixed income approaches may offer greater flexibility in adjusting" sector, credit, and geographic exposures":https://am.jpmorgan.com/us/en/asset-management/adv/investment-strategies/etf-investing/investment-ideas/flex-your-fixed-income/ than strategies that may be more constrained by index composition.

Unlike active management, passive strategies are strictly governed by a predetermined set of rules that dictate which bonds a fund must hold. Because these strategies must mirror the index, they are often unable to avoid specific risks or seize emerging opportunities.

The Canadian bond market has evolved amid higher interest-rate volatility, shifting inflation dynamics, and changing fiscal conditions. In this environment, some investors may consider whether an active approach to fixed income could potentially offer advantages relative to more passive strategies.

In October 2025, J.P. Morgan Asset Management introduced a range of active fixed income ETFs, as a result of growing interest in combining active management with ETF features such as transparency and intraday trading. While still evolving, these vehicles may provide investors with additional ways to implement active fixed income strategies alongside more traditional options.

As with any investment decision, Canadian investors may wish to consider their objectives, time horizon, and risk tolerance when evaluating whether active fixed income plays a role in their portfolios.