Bond Fund Performance Disappoints: Only 31% Outperform Indexes

Historically, actively managed bond funds have outperformed comparable index funds. However, recent data from Morningstar shows that just 31% of active bond funds outperformed index funds for the 12 months ended June 30. This marks a decline in the performance of active bond funds, which are supposed to be a safer and more reliable investment option compared to actively managed stock funds.

The performance of actively managed bond funds has historically been a reliable indicator of market stability. However, recent data from Morningstar reveals a notable decline in the performance of these funds. According to Morningstar's Active/Passive Barometer, just 31% of active bond funds outperformed their index fund counterparts for the 12 months ended June 30, 2025 [1].

The report attributes this decline to a combination of market volatility and the challenges faced by active managers. The year was marked by significant geopolitical risks, including elections, executive orders, and tariffs, which created a complex and volatile environment. Despite these challenges, passive funds outperformed their active counterparts in many categories, including bond funds.

Fixed-income categories, particularly corporate bonds, faced substantial declines due to long-term rate changes and credit spread widening. Active managers, saddled with higher fees, struggled to navigate this volatile environment. The corporate bond category saw a 60-percentage-point decline in success rates, dropping to a mere 3.9% [1].

While the decline in active bond funds' performance is concerning, it is essential to note that this is not a universal trend. Some categories, such as international stocks, saw an increase in success rates. Moreover, success rates can vary significantly from year to year, and longer time horizons may provide a more accurate picture of fund performance.

The report also highlights the importance of fees in fund performance. Funds in the cheapest quintile had a higher success rate than those in the priciest one, underscoring the importance of cost management in active investing [1].

Investors should use this data to make informed decisions about their bond fund investments. While active bond funds have traditionally offered higher returns, recent performance suggests that passive funds may be a more reliable option in volatile markets.

References:
[1] https://www.morningstar.com/funds/passive-funds-beat-active-amid-this-years-market-volatility