January 7: Active Bond Funds Gain as Tight Spreads Test Passive ETFs
Active bond funds are drawing fresh interest on January 7 as tight credit spreads and an uncertain Fed path pressure passive bond ETFs. For Swiss investors, lower starting yields mean less cushion if rates or spreads move against you. Many managers see the 5–10 year area as a practical balance between income and rate risk. We explain why active selection, flexible duration, and currency hedging matter now, and how to build a resilient CHF-based bond allocation.
Why active bond funds are gaining now
Credit spreads sit near historic tights, so there is little extra yield for taking corporate risk. When spreads are thin, small shocks can trigger outsized price moves. Active bond funds can shift between government, corporate, and securitized debt to protect capital. As ETF Trends notes, flexibility is an edge when the rate path is unclear source.
Active managers can trim lower-quality credit, rotate into higher-quality carry, or add defensive government bonds when volatility rises. For Swiss investors, currency also matters. Using CHF-hedged share classes can stabilise returns versus unhedged USD exposure. The ability to fine-tune duration and credit together, rather than tracking a fixed index mix, can help keep drawdowns contained when markets shift quickly.
The 5–10 year “sweet spot” for intermediate-term bonds
Intermediate-term bonds often balance income and rate sensitivity. In the 5–10 year bucket, duration risk is moderate, yet yields can be meaningfully higher than short paper. Morningstar has highlighted this “sweet spot” in today’s curve setup. Active bond funds can dial duration within that range, adding or trimming exposure as central bank signals and inflation data evolve.
Swiss savers often target steady CHF income with controlled volatility. A core of intermediate-term bonds, blended across high-quality corporates and Swiss or global government bonds, can support that goal. Active CHF-hedged strategies can capture global opportunities while limiting currency swings versus the franc. This approach complements cash and short-duration buckets without overextending into long maturities.
Passive bond ETFs under pressure from tight credit spreads
Many broad bond ETFs lean into large amounts of rate exposure and investment-grade credit. With credit spreads tight and yields lower than long-term averages, index-only exposure can face asymmetric downside if spreads widen. Without discretion, passive funds must hold the index through a drawdown. Active bond funds can pivot to higher quality or increase liquidity to avoid forced selling.
When starting yields are low, price drops can overwhelm income. Reuters warns that after a strong 2025, bond returns could cool as conditions shift source. For Swiss investors, this argues for selective credit, disciplined duration, and attention to hedging costs. Passive aggregate exposure still has a role, but we would size it carefully and pair it with flexible managers.
How Swiss investors can implement an active core
Focus on clear, repeatable processes. We look for managers with proven risk budgets across duration, sector, and issuers. Review downside records, not just yield. Check CHF-hedged share classes, turnover discipline, and liquidity. Costs still matter. Favor funds with transparent positioning, high active share versus benchmarks, and robust governance on credit research and currency management.
Start with an active core of intermediate-term bonds, add a sleeve of short duration for liquidity, and keep a smaller allocation to long duration as a diversifier. Blend investment-grade corporates with high-quality government bonds. Keep high yield modest while spreads are tight. For foreign bonds, use CHF hedges where appropriate and monitor hedge costs. Rebalance quarterly and stress test against rate and spread shocks.
Final Thoughts
Tight credit spreads and uncertain policy reduce the margin for error, so a flexible approach makes sense for Swiss investors. Active bond funds can adjust duration in the 5–10 year band, lift quality when signals worsen, and use CHF hedges to steady returns. Passive bond ETFs remain useful for low-cost core exposure, but we would size them carefully while spreads stay tight. A practical plan is to anchor the portfolio with an active intermediate-term core, keep ample liquidity in short duration, and add a controlled dose of higher income only when compensation is fair. Review risk budgets, track hedge costs, and rebalance with discipline.
FAQs
Why are active bond funds attractive when credit spreads are tight?
Tight spreads leave less extra yield for taking credit risk, so price moves can be sharp when sentiment turns. Active managers can reduce lower-quality exposure, shift into higher-quality carry, add liquidity, or raise government bond weight. That flexibility helps protect capital compared with index funds that must hold the entire benchmark through a widening episode.
What makes intermediate-term bonds a good core for Swiss investors?
Intermediate-term bonds balance income with moderate rate risk. In the 5–10 year area, duration is manageable while yields are often better than short paper. This aligns with CHF-based goals for steady returns. Active strategies can fine-tune duration inside that range, adapting as central bank signals and inflation data change.
How should I think about currency hedging for global bond exposure?
For CHF investors, unhedged USD or EUR bonds can add volatility that may not be rewarded. Hedged share classes can stabilise returns relative to the franc. Compare hedge costs and tracking differences, and align hedging with your time horizon. Many investors hedge most core bond exposure while leaving some equity currency risk unhedged.
Do passive bond ETFs still have a role in this environment?
Yes. Passive bond ETFs offer low costs and quick access to markets. The key is position sizing and pairing them with flexible active funds. With spreads tight and yields lower, we prefer a mix that uses active management for credit selection and duration calls, while keeping passive ETFs for efficient, transparent core exposure.
Disclaimer:
The content shared by Meyka AI PTY LTD is solely for research and informational purposes. Meyka is not a financial advisory service, and the information provided should not be considered investment or trading advice.
