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.

Key points:

  • 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:
    1. Active funds tend to have a greater tilt towards corporate bonds than what broad market index offers.
    2. Active managers adjust duration depending upon their view of where rates are headed relative to that proxy benchmark.
    3. 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.