VanEck 2025 Outlook Reveals Growing Trend in Active Fixed Income ETF Conversions

• The DoubleLine Securitized Credit ETF (DSCO) was launched after converting from a mutual fund, expanding access to an active income strategy in securitized credit markets.
• ETF conversions are gaining traction in the active fixed income space, with firms like AllianceBernstein and Eaton Vance also making the switch.
• Active ETFs provide investors with flexibility, tradability, and tax efficiency, particularly beneficial in managing risks from early defaults or bond calls.

The conversion of the DoubleLine Securitized Credit Fund to DSCO is emblematic of a broader trend in the fixed income market. ETFs now offer active income strategies that previously were accessible only through private partnerships or mutual funds. This shift allows for broader investor participation and introduces greater transparency and liquidity to traditionally less accessible markets.

The structural advantages of ETFs are especially pronounced in an environment where traditional fixed income instruments face compressed yield spreads. By adopting an ETF structure, active strategies like DSCO can better meet investor demand for diversified, income-focused options. This is particularly relevant for investors seeking alternatives to core bond exposure with potentially higher returns and better risk-adjusted profiles.

What Are the Implications of Mutual Fund to ETF Conversions?

Mutual fund conversions to ETFs are reshaping the investment landscape, especially in active fixed income. ETFs offer daily liquidity and price transparency, which can be a compelling benefit for investors looking to adjust their portfolios dynamically. These structural features make ETFs particularly well-suited for strategies that require frequent rebalancing or tactical adjustments.

The trend is also supported by the growing sophistication of investors who are increasingly favoring products that align with their specific liquidity needs and risk tolerances. For instance, the DoubleLine Opportunistic Core Bond ETF (DBND) has demonstrated strong performance by leveraging both top-down and bottom-up strategies. This performance has reinforced the value proposition of active fixed income ETFs among a segment of investors seeking income generation with lower volatility.

How Do Active ETFs Differ From Passive Fixed Income Strategies?

Active ETFs differ fundamentally from passive strategies by focusing on outperforming market indices through professional management. This approach allows for more flexibility in responding to market conditions, such as early bond defaults or refinancing events. Unlike passive strategies, which track an index, active ETFs can adjust their portfolios based on the manager's insights and market forecasts.

However, active management is not without its challenges. A recent Bloomberg study questioned the ability of active fixed income strategies to consistently generate alpha. While some funds have demonstrated strong performance, others have struggled to outperform their benchmarks. This raises important considerations for investors regarding the trade-offs between active management and passive investing, including cost, risk, and performance expectations.

What Are the Key Risks and Limitations of Active Fixed Income ETFs?

Despite their advantages, active fixed income ETFs come with certain risks and limitations. One of the key concerns is the potential for higher management fees, as active strategies often require more extensive research and portfolio adjustments. For example, DSCO charges a management fee of 49 basis points. While this is competitive, investors should evaluate these costs in the context of expected returns and risk profiles.

Another limitation is the performance variability associated with active management. While some active ETFs have shown strong returns, the performance can vary significantly depending on the manager's strategy, market conditions, and economic cycles. This variability underscores the importance of due diligence and a clear understanding of the fund's investment approach before committing capital.

In summary, the shift toward active fixed income ETFs reflects a broader transformation in the investment landscape. As investors continue to seek more flexible and tailored options, the trend of converting mutual funds to ETFs is likely to continue. However, investors should remain mindful of the costs, performance variability, and strategic fit when considering these products for their portfolios.