(Bloomberg) -- The moment bond powerhouses have been waiting for is coming into view, and the payoff is record sums of client cash flowing into actively managed ETFs.
With the Federal Reserve poised to cut rates as soon as September, investors poured $245 billion overall into active and index mutual funds and exchange-traded funds in the first half of the year, according to Morningstar Direct. That's compared to about $150 billion in the first half of 2023.
But active ETFs from the likes of Janus Henderson Group Plc, BlackRock Inc., Fidelity Investments and Pacific Investment Management Co. especially are surging in popularity.
Through July 12, active fixed-income ETFs have taken in a net $44 billion, about a third more than all of last year and more than three times as much as 2022, according to data compiled by Bloomberg.
"Investors are choosing active as a style and want a manager skilled enough to operate when yields are fabulous but spreads are tight and dispersion is high," Gargi Chaudhuri, chief investment and portfolio strategist for the Americas at BlackRock, said in a phone interview. "Having the income is important, but so is having active management and picking bonds."
Active bond ETFs have taken about a third of flows into all fixed-income ETFs so far this year — a jump from 16% last year, the Bloomberg data show. About $24 billion has been added to core and broad-based bond ETFs; asset-backed funds such as collateralized-loan obligation funds have also pulled in money.
Money managers are launching new active ETFs this year to capitalize on the shift, while others are converting existing mutual fund strategies into ETFs. Pimco, for example, filed plans with the Securities and Exchange Commission on July 10 to convert its $138 million mortgage-backed securities mutual fund into an ETF.
BlackRock pulled in a net $53 billion to fixed-income ETFs in the first half of the year, the company said on Monday. The world's largest money manager projects that global assets in active ETFs could reach $4 trillion by 2030 from the current $920 billion.
Janus Henderson's ETF tied to CLOs rated B to BBB increased by about $850 million so far this year, according to the company.
With the Fed now on course to start cutting interest rates in the wake of a benign consumer inflation read for June, active bond managers are about to see whether they can grab a chunk of the near-record $6.14 trillion sitting in money-market funds. Even a modest rate cut in the coming months will draw cash out of money funds surfing 5%-plus yields and back into the broader market as investors tie up their money for longer periods.
The industry has been loudly warning investors in money-market funds that they're at risk of staying too long in Treasury bills of 12 months or less, and they should consider moving into active-bond strategies. As traders now fully price in a September easing, two- and five-year Treasury yields have fallen appreciably from recent peaks near 5% and 4.75%, respectively.
"The Fed is undoubtedly on a rate-cutting trajectory and at some point for the investors sitting in money market funds, the penny will drop," Sinead Colton Grant, chief investment officer at BNY Wealth, said in a phone interview.
The Bloomberg US Aggregate Index has turned positive for the year during July and is on course for three-straight monthly gains — a run last seen in mid-2021. At the mid-way stage of the year, 91% of funds benchmarked to the Bloomberg Agg that manage more than $1 billion are beating the index, according to data compiled by Bloomberg for about 100 funds.
That's the best performance by active managers since 2012 and up from the 86% that beat the index in 2023 and 46% in 2022.
Active bond managers typically try to outperform the Bloomberg Agg index by shifting exposure to Treasuries, mortgages and corporate bonds — the three big areas in which relatively small changes can lead to higher returns than the broad market. Active bond managers can also buy new bonds when they're sold and thus benefit from the so-called new issue premium ahead of index strategies rebalancing at the end of the month.
Helping to propel the demand in active-bond ETFs is the growth of so-called model portfolios used by financial advisers and that include multiple stock and bond funds.
"If advisers weren't gravitating toward model portfolios, it would be a tree falling in the woods," Todd Rosenbluth, head of research at VettaFi, said in a phone interview. "But because there's billions of dollars that are connected to these models, it's having a stronger impact."
--With assistance from James Seyffart and Ye Xie.
(Updates with BlackRock's projections for global active ETFs in eighth paragraph.)
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