Bond investors can be forgiven for feeling a little intimidated these days. This year's disconcerting volatility is enough to give anyone pause. Plus, investors must sort through a vast array of choices that go well beyond U.S. Treasuries – such as emerging-markets debt, mortgage securities and bank loans to companies, to name a few.
Making the right choices among all these types of assets is difficult, let alone finding the bond funds to suit your needs.
One solution may be actively managed, multisector bond exchange-traded funds (ETFs), which offer a kind of one-stop shop for investing in debt. Unlike passive funds that follow a bond index, these ETFs are run by managers who pick and choose among a wide range of assets, some of which have previously been available only to big institutional investors.
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The funds have "democratized a lot of categories that were hard for individual investors to access," says Aniket Ullal, the head of ETF research and analytics at CFRA.
To be clear, multisector bond mutual funds have been around for decades. But the ETF versions of the strategy are relatively new, with nearly half of the ETFs included in Morningstar's multisector bond category trading only since the beginning of 2024.
But that doesn't mean they have no track records to review. Some companies converted their multisector bond mutual funds into ETFs, bringing along their return history. And many of the new ETFs have the same managers and strategies the companies have used for years in mutual funds.
So far, investors seem to like what they see. In 2024, these ETFs pulled in almost $13 billion in assets, up from just $3 billion the year before. That made multisector bond ETFs one of the fastest-growing ETF categories of the year.
Multisector bond ETFs provide a little extra oomph for investors
Multisector funds aim to provide more return than a traditional bond fund, without too much extra volatility.
On a spectrum of risk, industry experts say, a multisector bond fund falls between a "core-plus" fund, in which traditional bond investments are supplemented with slightly riskier assets, and a high-yield fund, in which very few of the holdings are investment-grade debt.
Most of the multisector bond funds Kiplinger examined for this article have about one-third to one-half of their money in assets that have single-A ratings or better from the debt-ratings services.
Multisector bond funds "are incrementally more risky, but they're going after incrementally more reward," said Daniel Sotiroff, an analyst at Morningstar Research Services. He likens them to "free-range bond funds: They can kind of invest in a little bit of everything, and they don't really have a lot of constraints."
That freedom to invest in all sorts of debt, however, means investors "really do have to look under the hood and figure out what's in them," says Kirsten Chang, an analyst at ETF research firm VettaFi.
We did just that below with funds we think are worth exploring. Prices, returns and other data are as of May 31, unless otherwise noted.
Five multisector funds for investors to consider
One of the top funds in the category is the JPMorgan Income ETF (JPIE). Andrew Norelli, one of the fund's managers, developed JPMorgan's multisector bond investment strategy in 2014; the ETF debuted in late 2021.
Norelli has invested heavily in securities backed by residential and commercial mortgages, many of which come with a government guarantee.
His allocation to these securitized products is more than twice the average for the category, according to Morningstar. With the government backing, just over half the portfolio is in assets rated single-A or above.
Norelli says the securitized assets he's been buying are "much cheaper" than corporate bonds that are similar in risk. "It's the not-so-secret way that we have been able to keep the volatility of the portfolio low" while producing returns similar to a high-yield bond fund, he says.
The fund has an average duration (a measure of interest rate sensitivity) of about 2.8, which is lower than many funds in the category and well below the duration of 6 for the Bloomberg U.S. Aggregate Bond Index, Norelli says.
A duration of 2.8 implies that the fund's value will fall by roughly 2.8% if interest rates rise by one percentage point – or will rise by a like amount if rates fall by one point.
Uncertainties in the geopolitical and monetary climate have "encouraged us to keep the interest rate risk of the portfolio relatively low," he says.
The fund yields 6.3%. Its expense ratio of 0.39% puts it among the very cheapest in the category, and its one-year return of 7.6% ranks in the top third of the category.
Bond giant Pimco has an even longer history. Sonali Pier, one of the managers of the Pimco Multisector Bond Active ETF (PYLD), says her company began the strategy more than two decades ago.
Although the ETF is a newbie, debuting in June 2023, it's already the second-biggest ETF in the category, with more than $5 billion in assets.
The Pimco fund holds about half as much corporate debt as the typical fund in the category, according to Morningstar, and it has less in bank loans and emerging markets than its peers. It also has more securitized mortgage debt than the typical fund in the category, focusing on assets that are government guaranteed.
Pier says the portfolio holdings represent a choice to be "positioned with resilience" in high-quality assets, with an eye to scooping up higher-yielding corporate debt if it becomes more attractive.
"You can build a diversified, high-quality portfolio with a pretty attractive yield without having to go really deep into economically sensitive areas," she says.
The fund yields 5.5%, and its expense ratio of 0.69% makes it costlier than many of its peers. Its one-year return of 8.8% puts it in the top 9% of funds in the category.
A category giant
Though parent BlackRock launched it only a little more than two years ago, the iShares Flexible Income Active ETF (BINC) has more than $9 billion in assets.
The fund is managed by Rick Rieder, BlackRock's global chief investment officer for fixed income and Morningstar's 2023 Outstanding Portfolio Manager. "He's kind of a rock star manager," says VettaFi's Chang.
More than 50% of the portfolio is invested in securities rated single-A or higher. More than one-fourth of the assets are currency derivative contracts, which funds can use to hedge the currency risks in international holdings or bet on the movement of one currency relative to another.
The fund's huge size and iShares' longtime focus on affordable products gives it an advantage on annual expenses, with a ratio of 0.40%. The fund yields 5.8%, and its one-year return of 7.1% puts it in the middle of the category.
The TCW Flexible Income ETF (FLXR) debuted in June 2024, but it's actually older than that: It was converted from a mutual fund that launched six years earlier.
"It's one of the few funds in the space that actually has a track record going back to 2018," says co-manager Jeffrey Katz. "The team and the strategy have been consistent since its inception."
Changing from a mutual fund to an ETF was rocket fuel. The fund had about $300 million in assets before the conversion; it has now more than tripled in size, topping $1 billion.
Morningstar analysts say an early bet on securities backed by commercial mortgages drove the fund to category-leading performance from 2018 to 2024 – something they say "is unlikely to be repeated."
Still, the fund's performance is holding up: It yields 5.9%, and its 9.4% one-year return puts it in the top 4% of its peers. Its expense ratio, at 0.40%, is among the category's best.
Katz says the market is being "complacent" about risk, so he has moved the fund into higher-quality assets than he'd hold in a normal market.
The fund is about one-third government debt – greater than the category average of 22%, although Katz says most of that is higher-yielding securities insured by the government. "We're not sitting in Treasuries; we have less than 3%."
The fund holds fewer corporate bonds than a typical fund in the category. "As we move into what we think is a slowing economy, I'd much rather own something that is not going to be impacted by weakening economies," says Katz.
The Hartford Strategic Income ETF (HFSI) is taking a different tack that appeals to investors with a bit more of an appetite for risk.
According to Morningstar, the fund has larger stakes in high-yield bonds, emerging-markets debt and bank loans compared with other funds. Just 42% of the fund is in assets rated single-A or above, a smaller proportion than many of the category's leaders.
"You're almost getting into that high-yield bond sort of category, but you're not quite there," says Morningstar's Sotiroff.
Wellington Management runs the fund for Hartford. Campe Goodman, a co-manager of the fund, is a 25-year veteran of Wellington who launched the company's multisector bond investment strategy in 2012.
"Wellington Management's team and resources rival the industry's best," says Morningstar analyst Tom Murphy.
Goodman says he typically loves U.S. high-yield corporate debt, but he isn't finding many good values there now. Instead, he's looking at corporate bonds in emerging markets.
"Over the past few years there has been a lot of concern about growth and macro-economic issues in emerging markets, but there have been a lot of companies that have done very well."
Examples are power utilities, telecoms and water and sanitation companies, which don’t have their fortunes tied to exports.
The fund is also finding opportunities in Europe, such as real estate debt and Eastern European banks. "You can always say there are babies being thrown out with the bathwater."
The fund yields 6.1%, and its one-year return of 8.7% puts it in the top 11% of funds in the category. Its expense ratio of 0.49% is cheaper than the category average.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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