Graphic: The passive fixed-income glut
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
| Fund | Treasuries | Corporate | Mortgages* | Cash & other | Municipal, other funds/not covered |
|---|---|---|---|---|---|
| Vanguard Total Bond Market Index-Institutional | 44.2% | 31.4% | 23.9% | -0.2% | 0.7% |
| PIMCO Total Return | 19.5% | 30.4% | 41.4% | 7.1% | 1.5% |
| Dodge & Cox Income | 9.0% | 40.3% | 41.4% | 6.6% | 2.7% |
| Western Asset Core-plus Bond | 31.2% | 40.1% | 29.1% | -0.5% | 0.1% |
| Fidelity Total Bond | 28.8% | 28.4% | 7.4% | 34.8% | 0.6% |
| Federated Hermes Tot. Ret. Bond | 14.5% | 35.5% | 1.3% | 36.1% | 12.5% |
| American Funds Bond Fund Amer. | 35.2% | 25.9% | 28.1% | 8.9% | 1.8% |
| Western Asset Core Bond | 25.9% | 36.1% | 37.9% | 0.0% | 0.1% |
| J.P. Morgan Core Bond | 20.1% | 31.1% | 38.5% | 9.9% | 0.5% |
| Loomis Sayles Core Plus | 26.1% | 40.9% | 27.6% | 5.2% | 0.2% |
| Wells Fargo Core Bond | 32.9% | 28.1% | 29.7% | 8.8% | 0.5% |
*Includes agency and private mortgages. Source: P&I's Mutual Funds Most Used by Defined Contribution Plans survey and Bloomberg LP
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