Bond index investing is on the rise. Morningstar explored the growing trend.
Morningstar’s Christine Benz discussed the pace of bond index adoption with Vanguard’s Rich Powers.
- Assets in passive equity strategies now exceed those held in active equity fund strategies but bond index fund adoption continues to lag behind stock funds.
- While historically bond indexing has lagged, the market is experiencing subtle shifts.
- Powers notes investors are getting more comfortable with equity indexing likely because they’ve had a “head start.” Investors had several years to familiarize themselves with equity indexing as a concept before fixed-income indexing as a concept came around.
- Key differences between an actively managed fund and bond indexes:
- Active funds tend to have a greater tilt towards corporate bonds than what broad market index offers.
- Active managers adjust duration depending upon their view of where rates are headed relative to that proxy benchmark.
- Active managers may dabble in non-investment-grade bonds while a bond index will focus exclusively on U.S. dollar investment-grade bonds.
Learn more about the rising trend from the full interview.