EXCHANGE-TRADED FUNDS

Why you should consider active fixed income ETFs

May 19, 2025

KEY TAKEAWAYS

  • Financial professionals prefer active management in fixed income, but most fixed income ETF assets are in passive strategies.
  • An active approach in an ETF brings the benefits of fundamental individual security research, experienced fixed income managers and tax efficiency that the ETF vehicle could offer to portfolios.
  • Financial professionals can lean into Capital Group ETFs’ time-tested approach to active management as part of their toolkit.

The overall market for fixed income mutual funds is $4.9 trillion, and 78% of those assets are actively managed, showing a preference for active management of fixed income mutual fund assets. ETFs in comparison, while increasingly popular, have only $1.8 trillion in assets under management and 16% in active fixed income ETFs¹ — despite the preference for active management in fixed income mutual funds. This chasm could be the result of a historical lack of active ETF availability and less understanding about active ETFs.

"Active bond management has come to the ETF market, and it's a true benefit for clients," said Mike Gitlin, president and chief executive officer of Capital Group. "It means they no longer need to settle for benchmark results and the limited interest rate and credit flexibility that may come with passive bond management."

Historically few active fixed income ETFs as options

Even before Capital Group launched a suite of active ETFs in 2022, the active ETF market was small compared to mutual funds. Market availability is growing after a regulatory change in 2019 made it easier to bring a certain kind of active ETFs to market.

For historical background, ETFs first listed in the U.S. in 1993 and were largely synonymous with passive investing because of regulatory hurdles that created challenges for active managers. As more active ETFs come to market and increase investment choice, allocations to active fixed income ETFs could close the gap. 

"It’s a matter of ‘when’ and not ‘if’ the gap between active and passive fixed income ETFs closes, and financial professionals would do well to be prepared to speak to clients about the role active fixed income ETFs can play in their portfolios."

Holly Framsted, Head of Global Product Strategy and Development at Capital Group

Financial professionals unaware of the benefits

A recent Capital Group survey revealed that less than 4% of total assets managed by financial professionals had been allocated to active fixed income ETFs, citing a lack of knowledge, even among those who were heavier users of fixed income and ETFs.

Less than half of financial professionals surveyed considered themselves “very confident” in their knowledge of active fixed income ETFs compared to seven-in-ten who were “very confident” in their knowledge of mutual funds. As more active fixed income ETFs come to market, we think financial professionals will accelerate their knowledge to see how they can use ETFs in investors’ portfolios.²

Active ETFs part of a bond toolkit

Passive fixed income ETFs are often guided by tracking a bond index or sector composed of hundreds, even thousands, of issuers. But that can have its disadvantages: for example, magnified risks such as heavily concentrated positions during times of market stress or ongoing difficulties of replicating the index. Of course, these disadvantages come as a result of passively managed fixed income strategies seeking to replicate the return pattern of an index or sector, rather than striving to outpace a benchmark.

That’s why financial professionals should know all the types of vehicles available to them — so they can construct portfolios where all of an investor’s assets, from mutual funds to separately managed accounts (SMAs), can work together.

Below are several capabilities of active fixed income ETFs, the last three of which are distinct to active management.

  • Intraday trading: Ability to buy/sell throughout the day to make real-time portfolio allocation changes instead of waiting to transact at the end of a day
  • Tax efficiency: Fixed income benefits from mechanisms such as in-kind transactions for fewer capital gain distributions to pursue greater tax efficiency and lower expenses than a mutual fund
  • Portfolio transparency: Fully transparent active ETFs may improve the investor’s experience because ETF holdings are published daily, a differentiating feature
  • Enhanced liquidity: As ETFs trade on an exchange, they have features that may alleviate liquidity constraints of owning individual bonds
  • Diversification from the index: Flexibility to diversify away from certain issuers that may be a large part of the index or to hold issuers not held in the index to seek better-than-benchmark outcomes, and ability to position a portfolio seeking downside resilience
  • Striving to beat the index: Strategies to seek better-than-index results after fees
  • Active professional oversight: Daily monitoring of a portfolio to consider all the moving parts involved in managing fixed income

How Capital Group ETFs seek to go beyond the baseline

Collaboration among portfolio managers, investment analysts and traders brings the highest conviction ideas into our ETFs. Liquidity sourcing, often a concern for financial professionals, is one of Capital Group’s core fixed income capabilities that comes from our scale ($577.9 billion³) relative to retail investors and decades of experience among our portfolio managers and traders. Our fixed income portfolio managers are able to access new issues across fixed income markets that may not be fully available to retail investors or smaller ETF issuers with limited resources to evaluate new issues. Our traders leverage their deep relationships to source investments, which could add value for shareholders.

Capital Group’s range of fixed income ETFs is backed by robust fixed income capabilities honed over more than 50 years of fixed income investing. At the heart of our investing is The Capital System™, our time-tested multi-manager system, that enables high-conviction, fundamental research-driven investing in our portfolios.

Capital Group’s investor-oriented approach to fixed income ETFs

Capital Group fixed income ETFs were also designed to leverage in-kind trades, or trades with non-cash securities, which portfolio managers believe can help pursue tax efficiency and potentially reduce transaction costs within the portfolio — like all ETF issuers.

Our ability to deliver securities, cash or a combination of the two when satisfying redemption requests may help the ETFs in two distinct ways:

 

  1. removes the need to “force sell” securities to satisfy redemption requests, allowing portfolio managers to maintain an investment without impacting existing shareholders.
  2. pursues tax efficiency by potentially delivering securities with a capital gain as a part of the redemption basket, with the tax being paid by the exiting shareholder.

"Within the fixed income investment group, we've always been tax aware in our strategies. With ETFs, we've become tax obsessed."

David A. Hoag, Fixed Income Portfolio Manager at Capital Group

When creating new shares of an ETF, Capital Group has the flexibility to receive securities, cash or a combination of the two. The ability to receive securities can help source bond issues from market participants, rather than having to purchase securities from bond brokers at a markup, potentially reducing costs for existing ETF shareholders.

The creation/redemption process allows the number of ETF shares to increase or decrease as needed, depending on market demand. The ETF issuer can work with an authorized participant to create and redeem the ETF’s underlying fund holdings in the primary market in order to meet investor demand to buy or sell ETF shares in the secondary market.

Capital Group’s ETF creation/redemption process

The image shows a general overview of Capital Group’s ETF creation and redemption process. On the left side of the image a market maker exists in the secondary market. The market maker interacts with buyers and sellers, then works with an authorized participant. The authorized participant is the intermediary between the market makers and ETF issuers. On the right side of the image, it shows how the authorized participant interacts with ETF issuers in the primary market: ETF shares flow between the authorized participant (overlapping both secondary and primary markets) and the ETF issuers. It shows how cash, securities or a combination of cash and securities can be delivered as baskets between the authorized participant and ETF issuers.

Authorized participant (AP): A broker-dealer that has a contracted opportunity with the ETF issuer to create and redeem shares in the primary market to meet market demand.

 

Market maker: A firm that helps set the market price for the ETF in the secondary market and executes client demand.

Some active fixed income ETF issuers may only accept cash to create new shares because it simplifies operations. Capital Group leverages the in-kind mechanism, and 50 years of experience and relationships in fixed income investing, to seek better outcomes for investors. Capital Group investment professionals use different methods to help our active ETFs remain as tax-efficient as possible while focusing on long-term investment objectives, even in certain years when fixed income ETFs may distribute capital gains for various reasons.

With a growing selection of actively managed ETFs, financial professionals can fine-tune their asset allocation frameworks and educate investors about the benefits of using active ETFs in fixed income portfolios.

The creation/redemption process allows the number of ETF shares to increase or decrease as needed, depending on market demand. The ETF issuer can work with an authorized participant to create and redeem the ETF’s underlying fund holdings in the primary market in order to meet investor demand to buy or sell ETF shares in the secondary market.

Learn more about our active fixed income ETFs:

TickerFundMorningstar category
CGUICapital Group Ultra Short Income ETFUltrashort Bond
CGSDCapital Group Short Duration Income ETFShort-Term Bond
CGCBCapital Group Core Bond ETFIntermediate Core Bond
CGIBCapital Group International Bond ETF (USD-Hedged)Global Bond-USD Hedged
CGCPCapital Group Core Plus Income ETFIntermediate Core-Plus Bond
CGMSCapital Group U.S. Multi-Sector Income ETFMultisector Bond
CGSMCapital Group Short Duration Municipal Income ETFMuni National Short
CGMUCapital Group Municipal Income ETFMuni National Intermediate
CGHMCapital Group Municipal High-Income ETFHigh Yield Muni
Learn more about ETFs
¹ Source: Morningstar, as of December 31, 2024.
² Source: Capital Group, as of February 13, 2024.
³ Source: Capital Group. Assets under management data as of March 31, 2025.
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