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"Passive investing can be effective in liquid, higher-quality, and homogeneous parts of the bond market. Yet, limitations of index coverage and real-world distortions make it hard to index major parts of the global bond market."
"One cause of the bond market’s inefficiency is the fact that most bonds are owned by a relatively small number of large investors, which can limit the number of buyers and sellers willing to transact. In turn, this small number of bond investors means relatively little trading outside of the largest, most liquid bonds. These factors can create challenges in pricing consistency and discovery."
"The complexity of the bond market is another feature that active managers can exploit to add value. Indeed, the range of bonds and combinations of features are potentially infinite. Even bonds from the same issuers may have distinguishing features, including differences in maturity, coupon, seniority, optionality, and covenants."
"The vast market for securitized debt includes a broad variety of types and styles. The more differentiated they are, the more likely it is that inefficiencies will exist."
Because the bond market is so fragmented, active bond ETFs have been around for years, while active equity ETFs is a relatively new development.
The real reason is simple: the S&P 500 is a powerful momentum-driven index, and U.S. markets have been leading the world. That makes it very hard to beat over several decades.
Bonds, on the other hand, are far less efficient. Their performance depends heavily on interest rates, which makes them far more vulnerable.
Comments
Index bond funds are planes without a pilot.
Bonds, on the other hand, are far less efficient. Their performance depends heavily on interest rates, which makes them far more vulnerable.