Volatility has quickly become the norm for not only the equity markets, but the fixed income sector as well. As investors continue to digest news about the economy, the fiscal health of the United States, rising inflation, and overall uncertainty about the path of interest rates, volatility in bonds has quickly increased. For investors, allocating their fixed-income portfolios has become a challenge.
The answer to meeting that challenge may be in rethinking what it is to be a bond investor.
Investors may be better suited to return-seeking rather than income. Not being bound by bond allocations or types, and focusing on total returns, both price gains and yield. And active ETFs make all of this possible.
Volatility Of Returns
For many investors, the main reason to buy bonds is the steady income they provide. Buying and holding a security, clipping a coupon, and then cashing in when the bond matures. In today’s market, that has a lot of appeal. Yields on a wide range of bond types and varieties are still sitting near highs. There’s good income to be had.
The problem is, the ride is anything but smooth.
That’s due to rising risks; the bond market has been pretty bumpy. Today, investors have been reacting to a wide range of issues and problems. This includes the still uncertain economic picture, dwindling data, concerns about geopolitical strife, war, and the fiscal health of the United States, as well as its growing debt balance. At the same time, inflation remains stubborn and growing. This has put considerable pressure on the Federal Reserve to meet its dual mandates of stimulating the economy and keeping the invisible hand of rising prices in check.
This chart of the ICE BofAML U.S. Bond Market Option Volatility Estimated Index, or MOVE Index- which tracks the volatility of the bond market- shows just how bouncy bonds have been. More recently, the chart has begun to rise again, indicating uncertainty in the fixed-income space.
Source: TradingView
Look Towards Total Returns
For bond investors, such volatility makes it difficult to stomach and plan. That is, if they are using a more traditional approach of coupon clipping. However, with all the volatility in the bond market, it may make sense to focus on a total return or return-seeking bond strategies.
First popularized by Bond King Bill Gross, total return fixed income investing focuses not only on yield, but on price changes of the underlying bonds. Here, managers seek to not only profit from income, but also from the price appreciation of the underlying bonds. Volatility in the bond market makes this style of investing particularly advantageous for skilled active managers. They can shift and move among bonds, use variables such as credit research and other fundamentals to determine a bond’s value. This creates a return profile that is not static- i.e., a bond’s yield- but one that is dynamic.
Return seeking takes total return and moves it one step further. Here, managers have the flexibility to allocate across different geographies and seek to exploit the differences and yields available across various fixed-income subsectors and other income-generating asset classes. This can include bread-and-butter fare, such as investment-grade debt and high-yield bonds, as well as emerging-market debt, floating-rate debt, convertible securities, preferred shares, CLOs, and other asset-backed securities.
Again, the strategy is dynamic in nature. According to asset manager Wellington, “return-seeking fixed income managers with flexible mandates can better take advantage of mini dislocations like these in real time.” With volatility rising and staying high, taking advantage of these short-term mispricings could be key to generating additional alpha in a bond portfolio. 1
Active ETFs Are The Way To Go
With return seeking now particularly beneficial in the current bond market, fixed investors may want to allocate accordingly. The best part is that the active ETF boom has made this very easy to do.
Active ETFs have been a game-changer for the fixed-income sector.
Structurally, ETFs offer compelling fixed income “wins” for investors, including their ability to lower taxes versus other fund structures. When it comes to return-seeking and total return strategies —potentially involving greater trading/turnover ratios —ETFs offer a way to pass on those taxes through the creation/redemption mechanism. This limits capital gains taxes. That’s important given that bonds by nature are already a higher tax asset class with coupon payments coming at ordinary income rates. This can be as high as 39% for investors—any tax savings help.
Moreover, the lower cost of management of ETFs makes it possible for investors to squeeze out every ounce of yield from a bond portfolio. When maximizing returns across various channels, this is a significant advantage for index funds, adding additional alpha to a portfolio.
Finally, ETFs can eliminate cash drag on a bond portfolio. Bond ETFs can be fully invested, allowing managers to deploy all their assets in securities and benefit from price changes, yields, and other potential gains across the fixed income sector. Here again, this leads to additional alpha generation.
For return-seeking and total return strategies, active ETFs have only enhanced the benefits. And with volatility rising, this could be the best time in years to use a return-seeking strategy for bonds. It makes sense to use them in a portfolio.
Fortunately, the active ETF boom has created numerous new choices for investors across the return-seeking and total return categories. By selecting one or more of these ETFs, investors can diversify manager styles and benefit from all the bond market volatility currently in place.
Total Return & Return-Seeking Bond ETFs
These ETFs were selected based on their low-cost exposure to active bond management and total returns. Thet are sorted by their YTD total return, which ranges from -2.8% to 4.7%. They have expenses ranging from 0.15% to 0.70% and assets ranging from $136M to $8.14B. They are currently yielding between 4.4% and 8.2%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| FLHY | Franklin High Yield Corporate ETF | $268M | 4.7% | 5.7% | 0.40% | ETF | Yes |
| YLD | Principal Active High Yield ETF | $160M | 4.7% | 7.2% | 0.39% | ETF | Yes |
| HYBL | SPDR Blackstone High Income ETF | $136M | 4.4% | 8.2% | 0.70% | ETF | Yes |
| JCPB | JPMorgan Core Plus Bond ETF | $5.78B | 3.6% | 5.06% | 0.40% | ETF | Yes |
| VPLS | Vanguard Core Plus Bond ETF | $138M | 3.3% | 4.6% | 0.2% | ETF | Yes |
| AVIG | Avantis Core Fixed Income ETF | $1B | 2.2% | 5% | 0.15% | ETF | Yes |
| HYDB | iShares High Yield Systematic Bond ETF | $600M | 2% | 7.1% | 0.35% | ETF | No |
| DBND | DoubleLine Opportunistic Bond ETF | $413M | 2% | 4.8% | 0.45% | ETF | Yes |
| CGCP | Capital Group Core Plus Income ETF | $4.5B | 1.8% | 4.8% | 0.34% | ETF | Yes |
| BINC | BlackRock Flexible Income ETF | $8.14B | 0.2% | 5.5% | 0.52% | ETF | Yes |
| TOTL | SPDR DoubleLine Total Return Tactical ETF | $3.1B | -0.7% | 5.2% | 0.55% | ETF | Yes |
| BOND | PIMCO Active Bond ETF | $3.5B | -1.1% | 5.0% | 0.58% | ETF | Yes |
| DFCF | Dimensional Core Fixed Income ETF | $3.35B | -1.3% | 5.0% | 0.19% | ETF | Yes |
| FBND | Fidelity Total Bond ETF | $5.1B | -1.5% | 4.9% | 0.36% | ETF | Yes |
| FIXD | First Trust TCW Opportunistic Fixed Income ETF | $4.4B | -2.8% | 4.4% | 0.65% | ETF | Yes |
All in all, the current volatility of the bond market can be exploited. Investors don’t just have to sit there. By return-seeking and total return elements via active ETFs, fixed income investors can score potentially bigger gains and additional alpha in their portfolios.
Bottom Line
Bonds are not supposed to be volatile. But here we are. And in that, switching our strategy is key. By focusing on return-seeking and total returns, investors can achieve significant gains. Active ETFs make this possible.
1 Wellington (June 2025). Return-seeking fixed income for an uncertain age?
