The Fed’s long-awaited interest rate cuts changed the dynamics of the bond market, resulting in a change in leadership between the largest fixed income mutual funds and exchange traded funds. Instead of short-term bond funds and credit-focused strategies leading the way in returns, funds more sensitive to interest rates took the lead.
“While high-yield bonds, floating rate, and leveraged loans performed well in 2022 and 2023, longer-dated, high-quality bonds were hit the hardest,” said Morningstar Senior Manager Research Analyst. List’s Tom Murphy explains. “This quarter saw a reversal of sorts.”
The overall fixed income market, as measured by the Morningstar US Core Bond Index, returned 5.2% in the quarter. The Morningstar U.S. Corporate Bond Index, which measures investment-grade corporate bonds, returned 5.8%, beating the Morningstar U.S. High Yield Bond Index’s 5.3% return. Some of the highest returns came from interest rate-sensitive long-term government bonds, with the Morningstar U.S. 10-Year Treasury Index returning 7.8%.
“The Fed lowered short-term interest rates, and long-term rates followed suit, falling during the quarter. Therefore, this helps support high returns on high-quality, long-term bonds. U.S. Treasuries, Agency Mortgages , investment-grade corporate bonds led the way,” Murphy said.
Here’s a look at how the largest actively managed funds in the U.S. (both actively and passively managed) performed in Q3 2024. The performance data in this article is based on each fund’s lowest cost share class. Some Funds may be listed in share classes that are not accessible to individual investors other than retirement plans. Retail investor versions of these funds can have higher fees, reducing returns to shareholders. For long-term benefits, if a share class was launched more recently than the stated period, older share classes have been replaced where available.
Third quarter performance of the largest active bond funds
The $84 billion Dodge & Cox Income Fund DOXIX posted the highest total return among the 10 largest active bond funds, rising 5.6%. It ranked in the 14th percentile in the U.S. median core-plus bond category. Morningstar’s Mara Dobrescu wrote in a September commentary: “The team also matched its duration with the Bloomberg U.S. Aggregate Bond Index, which has been consistently underweight in recent years, based on the belief that both interest rates and inflation should decline over the next three to five years.” Year too. ”
The highest ranking in this category was the $55 billion Vanguard short-term investment grade fund VFSIX, which ranked in the 14th percentile of the U.S. short-term bond category. However, as interest rates fell, the performance of short-term bonds deteriorated significantly, resulting in the fund’s return of 3.8%, the second-worst among the 10 largest active funds. The worst-performing fund was the $75 billion Vanguard Intermediate Tax-Exempt Bond Fund VWIUX, which returned 2.7%. However, since it is tax-free, the actual total return may be higher depending on the investor’s tax situation.
Third quarter performance of the largest passive bond funds
The $61 billion iShares 20+ Year Treasury ETF TLT returned 7.9% in the quarter, the best of the 10 largest index funds and ranked in the 38th percentile of the long-term government category. The $59 billion Vanguard Short-Term Bond Fund BSV ranked highest among 10 categories and in the 24th percentile among short-term bond funds. The worst performer was the $53 billion Vanguard Short-Term Inflation Tracking ETF VTIP, which returned 2.5%, followed by the Vanguard Short-Term Bond ETF, which returned 3.5% as short-term funds underperformed as interest rates fell. Ta.
Long-term performance of the largest active bond funds
The fund with the largest difference between five-year and quarterly performance was the PIMCO Income Fund PIMIX, which ranked in the 21st percentile in its category over the past five years but ranked in the 47th percentile in the third quarter. .
Long-term performance of the largest passive bond funds
Changes in the interest rate landscape can be seen in the returns of the iShares 20+ Year Treasury Bond ETF. Annualized returns over the past three years were -9.5%, but rose 7.9% in the third quarter, showing how longer duration funds magnify the impact of interest rate changes.
