Passively managed bond funds have the goal of exactly mirroring the performance of specified index. The job of those involved in managing passive funds is to replicate the performance of the index, by matching the holdings of the fund with the type of bonds and maturities held the index. For this reason they are also known as “Index Funds.” Passively managed funds tend to have very low annual expense ratios, as their portfolios have minimal turnover (reducing trading costs) and they don’t need to heavily research individual investments. Two popular examples of passively managed bond funds are the Vanguard Total Bond Market Index Mutual Fund (VBMFX) and the Barclays Aggregate Bond Fund ETF (NYSE: AGG). Both fund’s have the goal of tracking the Barclays Capital Aggregate Bond Index. Actively Managed Bond Funds The goal of an actively traded bond fund is to outperform a specified index, while holding similar type securities. Essentially, they have a more concentrated portfolio than an index. They expect the securities that they hold to do better than the overall index. To find these “investment winners”, they do lots of research. Actively Managed Mutual Funds and ETFs tend to have higher annual expense ratios, as they need to employ strategists and researchers to analyze individual securities. Additionally, the portfolios tend to have higher turnover, which adds to trading costs. Two popular examples of Actively Managed Bond Funds are the PIMCO Total Return Fund (PTTRX) which is the largest mutual fund in the world, and the PIMCO BOND ETF which is the ETF version of the Total Return Fund. Which is better? Most Actively Managed Bond Funds Underperform Their Indexes In a Vanguard Report titled, “Debunking Some Misconceptions About Indexing”, there is some great data about relative performance. In the overwhelming majority of cases, actively managed funds underperform the indexes they track when looking at …
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