3 Promising Bond ETFs to Keep an Eye On

Key Concepts

• ETF Rule (2019): Expanded operational flexibility for Exchange Traded Funds (ETFs).
• Active Bond ETFs: ETFs employing active management strategies in fixed income.
• Fixed Income Sleeve: A portion of an investment portfolio allocated to fixed-income securities.
• Basis Points (bps): One-hundredth of a percentage point (0.01%).
• Top-Down Allocation: Investment decisions made at a broad, strategic level (e.g., sector allocation, interest rates).
• Bottom-Up Security Selection: Investment decisions made by analyzing individual securities.
• Risk-Adjusted Basis: Evaluating investment performance considering the level of risk taken.
• Duration: A measure of a bond's price sensitivity to changes in interest rates.
• Credit Risk: The risk that a borrower will default on their debt obligations.
• Credit Spreads: The difference in yield between a corporate bond and a comparable government bond, reflecting credit risk.
• Securitized Bonds: Bonds backed by a pool of assets, such as mortgages or auto loans.
• Emerging Market Debt: Bonds issued by governments or corporations in developing countries.
• Core Plus Bond Offering: A bond strategy that includes core bond holdings plus some opportunistic or higher-risk investments.

Active Bond ETFs: A New Frontier

The landscape of Exchange Traded Funds (ETFs) has evolved significantly beyond broad market passive strategies, largely due to the SEC ETF rule enacted in 2019. This rule enhanced the operational flexibility of ETFs, making them suitable vehicles for a wide range of investment strategies. Active bond ETFs have been a major beneficiary of these changes, allowing investors to access active fixed-income managers with the convenience, transparency, and often lower fees associated with ETFs, presenting a formidable challenge to traditional bond mutual funds.

Promising Active Bond ETFs

The video highlights three specific active bond ETFs that offer more than typical index-tracking funds:

1. iShares Total Return Active ETF (BRTR)

• Manager: iShares, leveraging BlackRock's Active Fixed Income Organization.
• Leadership: Industry veteran Rick Reer leads the fixed income group, overseeing the fund with lead manager Chan. The management team comprises long-standing members of BlackRock's fixed income organization.
• Strategy:
  • Top-Down Allocation: Managers make strategic decisions on sector allocation and interest rate calls, and determine the fund's risk budget.
  • Research & Risk Management: Utilizes BlackRock's research capabilities to identify market trends and BlackRock's Aladdin platform for precise risk management.
  • Sector Specialists: Employs BlackRock's teams of sector specialists for fundamental research and security selection at the sector level, ensuring both breadth and depth of market expertise.
• Performance:
  • Between January and August 2025, BRTR outperformed the category average by 45 basis points and the category index by 49 basis points.
  • The mutual fund sibling, with a longer track record under lead manager Rick Reer since 2010, has consistently beaten both benchmarks on an absolute and risk-adjusted basis.

2. Dimensional Core Fixed Income ETF (DFI)

• Manager: Dimensional Fund Advisors.
• Strategy: Aims to outperform the market by systematically managing its duration and credit risk profile.
  • Expected Return Calculation: Bond prices are used to calculate an expected return for each eligible bond. Bonds with the best return potential are pursued within defined constraints that shape the fund's duration and geographical positioning.
  • Duration Tilt: Generally tilts towards shorter-term bonds when the yield curve is flat or inverted.
  • Systematic Credit Risk: Credit ratings are adjusted to reflect market opinions using price, market yields, and credit default swaps. The fund sticks to investment-grade bonds but shifts towards lower-rated bonds when credit spreads widen and higher-rated bonds when they tighten.
  • 2024 Performance: Compressed credit spreads in 2024 led to an allocation to triple-B rated bonds above the category index. The fund outperformed the index by 71 basis points between January and November 2024.
  • Constraints: The fund's composition remains close to the Bloomberg US Aggregate Bond Index in terms of duration, industry, and issuer thresholds.
  • Trading Philosophy: Employs a flexible trading approach, selecting bonds with the lowest rating cost from a basket of eligible bonds with similar characteristics.
• Fees & Performance:
  • An affordable 17 basis point annual fee.
  • Between its November 2021 inception and August 2025, DFI outperformed its category index and category average.
  • Risk-adjusted returns were superior to both benchmarks over this period.

3. DoubleLine Opportunistic Core Bond ETF (DBND)

• Manager: DoubleLine Capital.
• Leadership: Veteran duo Jeffrey Gundlach and Jeffrey Sherman are lead managers, supported by strong teams of sector specialists.
• Strategy: A core plus bond offering with a strong emphasis on sector expertise.
  • Asset Allocation Committee: DoubleLine's monthly committee sets high-level guidelines for sector allocation, duration, and risk.
  • Bottom-Up Security Research: Sector portfolio managers contribute bottom-up research and select their best sector picks.
  • Favored Sectors: Often favors securitized and emerging market debt, areas of significant expertise for the sector managers.
  • Securitized Bond Allocation: Nearly 50% of the portfolio is allocated to securitized bonds, a significant overweight compared to the category average, which heavily influences returns.
  • Duration Management: The ETF's duration tends to track that of the average peer and the broader bond market.
• Performance:
  • Between its March 2022 inception and August 2025, the ETF outperformed the category index by 57 basis points annually with lower volatility.
  • 2022 Performance: A strong year due to the fund's shorter duration.
  • 2024 Performance: Good credit risk selection also contributed positively in 2024.

Conclusion

The evolution of ETFs, particularly the 2019 SEC rule, has paved the way for active fixed-income strategies to gain traction. The iShares Total Return Active ETF (BRTR), Dimensional Core Fixed Income ETF (DFI), and DoubleLine Opportunistic Core Bond ETF (DBND) represent promising options for investors seeking active management in their fixed income portfolios, offering competitive performance, specialized strategies, and the inherent benefits of the ETF structure. These funds demonstrate that active management within the ETF wrapper can deliver alpha and cater to diverse investor needs.