Core Insights - The Federal Reserve is expected to cut rates by 0.25% at its September 16 meeting, prompting investors to seek value in fixed income markets [1] - The iShares Core U.S. Aggregate Bond ETF (AGG) is commonly used but represents only a narrow segment of the bond market, potentially overlooking higher-yielding opportunities [1][2] Bond Market Overview - The Bloomberg U.S. Aggregate Bond Index includes approximately half of the $58 trillion U.S. bond market, focusing on U.S. government bonds, agency mortgage-backed securities, and investment-grade corporates, while excluding several sectors [2] - Omitted sectors such as inflation bonds, high-yield bonds, and non-agency MBS often provide additional yield and diversification [3] Active Management Benefits - Active management in bond investing allows for rotation across various segments of the fixed income market, capturing relative value and adjusting to macroeconomic cycles [5] - Morningstar data indicates that nearly 80% of core-plus active bond managers outperformed their benchmarks in 2024, contrasting with only 35% of active equity managers [6] Example of Active Bond Funds - BlackRock's iShares Flexible Income Active ETF (BINC) exemplifies a flexible bond fund, maintaining minimal exposure to U.S. Treasuries and investing in non-U.S. corporate bonds, high-yield credit, and commercial mortgages [7][9] - Over the past year, BINC returned 6.58%, significantly outperforming AGG's 2.84% return, with a higher SEC yield of 5.2% compared to AGG's 4.2% [10] Alternatives to AGG - Other multi-sector bond funds such as PIMCO Multi-Sector Bond ETF (PYLD), JP Morgan Income ETF (JPIE), and Columbia Needle Diversified Fixed Income Allocation ETF (DIAL) have also outperformed AGG despite higher management fees [11] Risks of Multi-Sector Funds - Go-anywhere funds may carry risks due to exposure to less liquid, higher-yielding instruments, which can amplify drawdowns during market stress [12] - Despite these risks, multi-sector bond funds have shown the ability to deliver higher income and stronger returns over complete cycles compared to passive index funds [12] Conclusion on Investment Strategy - Investors limiting themselves to passive bond indexes may miss out on higher yield and diversification opportunities available in less liquid segments of the bond market [13][14] - Active multi-sector ETFs present a compelling alternative for investors seeking income, diversification, and total return [14]