Within fixed-income mutual funds in U.S. defined contribution plans, passive offerings have gained significant share and now make up more than a quarter of assets. Passive funds clearly have the lowest expense ratios, but would active investment options better help participants achieve their retirement objectives?
Two behemoths: Both Vanguard and Fidelity have seen large increases in assets allocated to passive fixed-income strategies over the past 20 years. Total assets in the firms' most popular passive fixed-income mutual funds have soared to $71.2 billion from $1.4 billion in 1997.
Asset growth (billions)
A better option: Active funds, net of fees, have provided both superior returns and lower risk. The largest active funds in DC plans sailed through the COVID-19 market turmoil; all but two had a smaller drawdown than a typical passive strategy. Every fund had higher returns over the past 10 years, with an average outperformance of 73 basis points, net of fees.
10-year return and most recent drawdown relative to asset size
Reliance on Treasuries: The largest index strategies track the Bloomberg Barclays U.S. Aggregate Float Adjusted index, which has become a concentrated bet on the U.S. government. More than 60% of the holdings of the largest passive funds are either U.S. Treasuries or agency mortgage-backed securities.
Holdings of the largest mutual funds
Cash & other
Municipal, other funds/not covered
Vanguard Total Bond Market Index-Institutional
PIMCO Total Return
Dodge & Cox Income
Western Asset Core-plus Bond
Fidelity Total Bond
Federated Hermes Tot. Ret. Bond
American Funds Bond Fund Amer.
Western Asset Core Bond
J.P. Morgan Core Bond
Loomis Sayles Core Plus
Wells Fargo Core Bond
*Includes agency and private mortgages. Source: P&I's Mutual Funds Most Used by Defined Contribution Plans survey and Bloomberg LP