The Case for Actively Managed Bond Funds

Actively managed stock funds consistently underperform their passively managed counterparts. Indeed, just 20% of active large-cap stock index funds over the past 10 years survived and outperformed their index fund peers.¹

When it comes to actively managed bond funds, however, the opposite is true: Some 80% of surviving active core bond funds with a 15-year track record beat their index counterparts over that period.²

The reason? "Flexibility," says Dan Weiss, director of investment due diligence at the Schwab Center for Financial Research. "The bond market is less efficient than the stock market, and active managers can adjust their holdings, within the limits of their strategy, to exploit those inefficiencies. Passive funds, on the other hand, must faithfully track their benchmark index."

For example, the Bloomberg U.S. Aggregate Bond Index—the most common benchmark for passive and active funds—holds only investment-grade bonds, whereas an active manager might be able to add high-yield corporate bonds to potentially generate excess returns.

That helps explain why 72% of active funds in the intermediate core bond category outperformed their passive peers over the 12-month period that ended June 30, 2024, driven in part by a surge in high-yield prices amid interest rate uncertainty.³ (A fund's prospectus will address the extent to which a fund's holdings may stray from its target strategy.)

That said, an investor can benefit from that potential outperformance only if the fund has the right manager. But finding one that fits your investment goals and risk tolerance is a tall order.

It's typically not enough to look at recent performance. Instead, evaluate how the fund has performed under different market conditions and over longer time spans. Also compare how similar the fund's holdings are to its passive peers. "Beware 'closet index funds,' which are active funds that closely resemble their passive counterparts," Dan says. "If you're paying for active management, you should be getting your money's worth."