The ‘active versus passive’ debate has long been hot and contentious writes Alexis Marinof, (pictured) Head of SPDR ETFs, EMEA. He continues: “The debate intensifies when it comes to fixed income, and there are fierce discussions over traditional actively managed market segments, such as emerging market debt and convertible bonds.
“However, there is evidence a passive approach to fixed income may offer a more consistent and predictable source of performance. Even in some less efficient markets, such as high yield and emerging market debt, the ability of active approaches to consistently outperform their benchmark has come under question. In the three-year period to December 2015, a remarkable 83 per cent of the 30 largest actively managed emerging market debt funds underperformed their local currency benchmark.
“For many fixed income investors, consistent and predictable returns are primary objectives, making the decision on which benchmark to select all the more important. Among other characteristics, the CFA Institute believes an appropriate benchmark should be unambiguous, investable, measurable and appropriately representative of the opportunities available.
“The rise in fixed income ETF investing shows no sign of abating, 2015 saw the greatest increase in fixed income ETF assets on record, with net inflows hitting almost USD90 billion. This is largely due to the surge in popularity of ETFs in general. By the end of 2015, 37 companies had launched ETFs for the first time, taking the total number of ETF providers up to 276 globally, according to ETF Global Investors.
“Since the first fixed income ETF launched in 2002, the market has endured the 2004 Fed tightening cycle, the credit crisis, sovereign debt crisis, the fiscal cliff, the debt ceiling debate, the “taper tantrum,” the energy bear market since mid-2014, and fears of a Grexit. Along with the introduction of 3143 other fixed income ETFs during this period, market events over the last 14 years have showcased the efficiency and merit of employing fixed income ETFs.
“The fixed income market will continue to evolve and the pace of divergence of monetary policies of the world’s major central banks is something to monitor as we progress through 2016. The US Federal Reserve has begun tightening monetary policy while the European Central Bank has adopted a large-scale quantitative easing programme. Other factors also playing on investor minds, including concerns about Chinese growth and currency devaluation remain a feature of market chatter.
“As regional monetary policies diverge, political landscapes change and economic growth prospects fluctuate over time, the flexibility of ETFs as a way to invest across the yield curve may prove particularly beneficial for many investors. The fixed income ETF universe has expanded to the point where an appropriate ETF is likely available to satisfy the specific needs of most investors. And if there isn’t, the rapid growth of this market to date suggests it may only be a matter of time.”
