How to Pick the Best Active Bond ETFs and Mutual

The surging popularity of passive investing has left active asset managers scrambling. That’s the headline story, but it’s not the whole one, as we’ve detailed in recent issues of Morningstar magazine. For one thing, active exchange-traded funds have seen net inflows even as their mutual fund counterparts lost shareholders. And unlike active equity managers, most active bond managers actually tend to outperform their benchmarks. (See “Active Bond Funds More Likely Than Equity Funds to Beat Passive Counterparts” in the Q4 2024 issue.) Research from Morningstar manager research’s fixed-income team indicates that fixed income is still a bastion of active management.

In the Q3 issue, Eric Jacobson examined the reasons “Why Active Investing Works in Fixed Income.” Among them: Market fragmentation and infrequent trading make the vast bond market difficult to index, and some sectors don’t even have corresponding indexes. In the Q1 2025 issue, Maciej Kowara and Alec Lucas shared “What the Worst Bond Market in Modern History Taught Us.” One of the lessons: A multisector bond approach can provide exposure to the market’s most attractive opportunities.

This isn’t a call to abandon low-cost indexing for a core portfolio. But these insights might prompt index investors to add a top active manager or two to the mix. Here’s how I approached a search, using tools available to paying Morningstar.com subscribers.

I started at Tools, which are unlocked for paying subscribers, and clicked on Screener.

Originally created for the Q2 2025 issue of Morningstar magazine.

Within the Screener, I selected Investment Type: ETFs. I started with ETFs not because I value the ability to do intraday trading of bond funds (or any funds, for that matter) but for the tax efficiency and low costs that ETFs offer relative to mutual funds. Then, Asset Class: Taxable Bond.

I narrowed the universe down to three diversified Morningstar Categories that give managers extra leeway: intermediate core-plus bond, multisector bond, and nontraditional bond.

Finally, I homed in on those ETFs with Morningstar Medalist Ratings of Gold, Silver, and Bronze—those funds that Morningstar expects will add value for investors, after fees. I named my screen “Active Bond Funds.”

Originally created for the Q2 2025 issue of Morningstar magazine.

I saved my View as Active Bond Data in case I want to use it again. I then sorted the list of funds by Index Fund, selected those with No in the column, and used the Watchlist button to save those that meet my basic screen. (I created a new Watchlist named Active Bond Funds, then used Add to Watchlist.)

A quick glance at the Morningstar Rating for Funds column reminded me that many of these ETFs don’t yet have the three-year track record required for a star rating. Active fixed-income funds are newer to the market than active equity ETFs, and many firms haven’t launched one. The reason these young ETFs earned high Medalist Ratings is that they share strong People, Parent, or Process ratings with similar, older mutual fund strategies; these are the integral pillars of the Medalist Rating.

Originally created for the Q2 2025 issue of Morningstar magazine.

Now, I moved to the Watchlist tool, found right above the Screener in Step 1. Here, I opened my Active Bond Funds list and clicked on More to import the tickers of the mutual funds I want to add to the ETFs. Like the Screener, the Watchlist tool also has a selection of preset Views to choose from. I customized my view under Data & Columns, singling out data points that would allow me to quickly narrow down the list. Because I had so many options, I discarded the Bronze-rated funds, as well as those with asset bases under $1 billion, as small funds may not stick around if they don’t grow big enough to cover their costs. I also pulled out obvious duplicates, such as the mutual fund version (FTBFX) of Fidelity Total Bond ETF FBND, and BlackRock Total Return MSHQX, which corresponds with iShares Total Return Active ETF BRTR.

Originally created for the Q2 2025 issue of Morningstar magazine.

Source