Bond investors tend to be a conservative lot. After all, the “fixed” in fixed income comes from the steady coupon payments and repayment of principal that bonds make to their holders. Even the placement in the bankruptcy ladder for most bonds implies a conservative approach. And as such, many bond investors tend to own the most conservative of bonds — U.S. Treasury bonds, bills, and notes.
While there is nothing wrong with this approach, these investors may be selling themselves short. Being a bit dynamic with their income approach could prove more fruitful.
And that’s just what dynamic income bond investing is all about. Also called multi-asset or strategic bond investing, moving beyond the broader investment-grade universe can provide a much stronger subset of income opportunities and returns for a portfolio. And believe it or not, potentially lower risks and volatility as well.
Dynamic Income Basics
Tracing its origins back to 1973 with investment bank Kuhn, Loeb & Co., and its two early bond indices, the Bloomberg Barclays U.S. Aggregate Bond Index (Agg) has grown to become the standard benchmark for the fixed-income sector. Today, the Agg covers more than 10,000 investment-grade bonds.
There’s nothing wrong with the Agg, and it does serve as a good benchmark and core bond holding. After all, the bulk of the index is steady-eddy U.S. Treasury bonds. For many fixed-income investors, this is a great place to park their money and collect interest.
But there is a whole world of bonds out there beyond the Agg. In fact, the bulk of IOUs — in terms of both dollar amount and number — exists outside the world of core bonds in the Agg.
This is where dynamic income investing looks to tread.
Also called strategic or multi-asset income, dynamic income seeks 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. And, depending on the fund’s mandate, also include dividend-paying public equities, REITs, infrastructure securities, and master limited partnerships (MLPs).
The idea is that these multi-asset income strategies are dynamic and actively managed. This allows managers to adjust asset-class weightings based on market or economic conditions, potentially delivering additional alpha and income to a portfolio.
Why Bother?
The question many investors may be asking themselves is, “Why bother? Why own CLOs or emerging market debt if I can get a good yield in a 10-year bond?” The answer lies within better returns, lower volatility, and potential tax advantages.
First, there are the returns to consider. Because dynamic income funds can be nimble, shift allocations, and buy various bonds as needed, they have managed to be top long-term performers compared to regular core or intermediate funds. Morningstar has the data on these returns.
Looking at its multisector bond category, Morningstar found that over the last three years, these funds managed to post a 3.15% annualized return and a 4% return over the last five years. While that may not seem great on the surface, it is good. Especially when compared to core bonds. The Morningstar US Core Bond Index has generated a 1.12% annual return over the last three years and has lost 0.82% annually over the last five years. These are total returns including dividends. That’s not very good for investors looking toward bonds for safety. 1
This chart sums up dynamic income’s market-beating returns over the last tightening and cutting cycle.
Source: Morningstar
The best part is that these better returns have come with lower volatility. While asset classes like junk bonds, emerging market debt, and senior loans may sound high risk, that’s not always the case. The dynamic approach to fund management helps deliver potentially lower risk and a lower standard deviation of prices.
A recent example of this was the 2022 tightening environment that lasted through last year. According to asset manager Voya, since the Federal Reserve’s hiking cycle began in early 2022, dynamic income has shown lower drawdowns than both equities and the Agg. Moreover, when looking at per unit of risk, multisector bond funds have much better Sharpe Ratios than the broader stock and bond market. 2
Using a Dynamic Approach
The result is that dynamic and multi-asset bond strategies can provide a different set of income and returns to a portfolio. And as such, they deserve a spot in your portfolio. The key is to think of them as a complement to core bonds like the Agg. However, strategic income is not the same as core-plus. Core Plus simply looks at the Agg and the broader investment-grade bond world and weights them differently. Dynamic income approaches literally will buy anything and everything as market conditions change or managers feel the need.
The question is, how to do it?
There are enough ETFs available that cover many of these asset classes. You could cobble together a basket of them for your portfolio. But given the dynamic and active approach to this strategy, it may make more sense to go with a professional. Luckily, the number of dynamic active bond funds has exploded in recent years. Today, investors have a wide range of choices at a low cost to build a dynamic income component to their portfolios. Pairing one or two of these with a broader index fund may be all they need.
Dynamic Income ETFs
These ETFs were selected based on their low-cost exposure to active bond management within the unconstrained, dynamic, and go-anywhere sectors. They are sorted by their YTD total return, which ranges from -1.3% to 2%. They have expenses between 0.18% and 0.71% and assets between $243M and $31B. They currently yield between 3.9% and 8%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| TOTL | SPDR DoubleLine Total Return Tactical ETF | $3.5B | 2% | 5.1% | 0.55% | ETF | Yes |
| BOND | PIMCO Active Bond ETF | $5.5B | 1.9% | 5.0% | 0.71% | ETF | Yes |
| FIXD | First Trust TCW Opportunistic Fixed Income ETF | $4.32B | 1.9% | 4.3% | 0.65% | ETF | Yes |
| JPST | JPMorgan Ultra Short Income ETF | $30.7B | 1.7% | 4.6% | 0.18% | ETF | Yes |
| DBND | DoubleLine Opportunistic Bond ETF | $413M | 1.6% | 5% | 0.45% | ETF | Yes |
| MINT | PIMCO Enhanced Short Maturity Active ETF | $12.8B | 1.5% | 4.8% | 0.35% | ETF | Yes |
| FBND | Fidelity Total Bond ETF | $18.1B | 1.4% | 4.9% | 0.36% | ETF | Yes |
| DFCF | Dimensional Core Fixed Income ETF | $243M | 1.4% | 3.9% | 0.19% | ETF | Yes |
| BINC | BlackRock Flexible Income ETF | $8.14B | 0.2% | 5.5% | 0.52% | ETF | Yes |
| SRLN | SPDR Blackstone Senior Loan ETF | $9.49B | -1.3% | 8.0% | 0.70% | ETF | Yes |
Overall, dynamic income is an active approach that provides the ability for bond investors to move beyond the core bond world and into other fixed-income sectors. This approach pays plenty of benefits in terms of returns and diversification. For investors, a dynamic approach to their income portfolios makes a lot of sense, especially in the current, volatile fixed-income environment..
Bottom Line
Dynamic income strategies could be a great bet for portfolios these days. By actively betting on different corners of the bond world, investors can achieve plenty of benefits, including higher returns.
1 Morningstar (April 2025). 3 Top-Performing Multisector Bond Funds
2 Voya (September 2024). Better Together: How Unconstrained Bonds Can Help Enhance Fixed Income Portfolios
