Passive investing is a bit like driving with cruise control. Choose your route, settle into your lane and let the car maintain its speed.
Passive bond funds are booming. But are they tracking what you think?
For equity investors, that approach has often worked well. Tracker funds are typically low cost, transparent and straightforward to understand.
It is no surprise that bond exchange-traded funds (ETFs) and passive fixed-income funds have also grown rapidly in recent years.
But bonds are not simply shares with coupons attached. Fixed-income markets operate differently, particularly when trading conditions become more challenging.
Investors should understand when a passive approach is sufficient and when a more active hand on the wheel may add value.
Why go passive?
A passive bond fund follows an index rather than trying to outperform it. Investors gain broad market exposure without paying a manager to make active decisions on interest rates, economic growth or individual issuers.
The appeal is clear. Costs are generally lower, the approach is easy to understand and performance can be measured against a transparent benchmark. In large and liquid markets, that may be entirely appropriate.
Search Panacea’s library of insight, technical commentary and adviser resources to quickly find guidance on client and regulatory questions.