Why Bond Funds Benefit From Active Management

Active management can still win in the bond market.

Why it matters: Opportunities abound for active managers to best their passive peers and benchmarks. And here’s why: they have access to tools, asset classes, and flexibility that their competition does not. Right now, the bond market is ripe for them to succeed. A deep dive in Morningstar Magazine’s first quarter 2026 issue makes the case why everyday investors should consider adding active bond funds to their portfolio.

Eric Jacobson, senior principal of fixed-income strategies for Morningstar, and Maciej Kowara, principal of fixed income strategies for Morningstar, co-authored the article.

8 Questions on Active Investing in the Bond Market

1. Passive investing is pretty popular. Yet you argue the strategy comes up short in fixed income. Why do you believe active bond managers generally win against their benchmarks unlike active equity managers?
2. Let’s talk about ownership within the bond market. Who are the investors, how often do they trade bonds, and where are they trading them?
3. The complexity of the bond market creates significant opportunities to exploit inefficiencies. How are active bond managers doing that in US Treasury bonds, corporate debt, and securitized debt?
4. Your research lays out real-world crises where passive bond investing would have put investors at a disadvantage. Can you describe one of those situations, and how investors would have been on a roller-coaster ride?
5. How do everyday investors find a fairly-priced active bond fund? What qualities do these investments have?
6. The N-Port data showed active bond managers hold a structural advantage over their passive peers. Can you describe how they’re taking on more market exposure and using financial leverage?
7. How do holdings typically differ between most actively managed funds and an index fund like Vanguard Total Bond Market? And why do active managers take on more lower quality debt?
8. You’ve written that there’s a basic recipe for active bond managers to improve their odds of winning in most market environments. What’s the recipe, and why do you think it works?

Key Quote on Managers Selecting Lower-Quality Debt in Active Investing

I think their thinking is BBB, if you look at historical default statistics, they are still very low. So you can get this extra yield for very marginal uptick in the probability that the bond will default on you. That’s one thing. And the ABS, asset-backed issue, as I said, some of them, they are not all great, but the high-quality asset-backeds, they haven’t even defaulted during 2008 crisis.

The Takeaway: Active bond managers are hunting for inefficiencies to exploit across bond markets. They won’t find much in the US Treasury bonds, says Jacobson. He calls the US Treasuries the most efficient and easily traded sector of the market. Opportunities become available when you step over to other sectors, though, including corporate debt, and especially in terms of the size, quality, and structure of a bond. If the debt is smaller, a little riskier, or more complex, it takes more work to judge whether it’s priced right, providing more chances of finding something unnecessarily cheap. He says active managers can find even more opportunities with securitized debt because of asset diversity and the fragmented nature of the market.

More From Morningstar on Active Investing in the Bond Market

When investors are looking for a fairly priced active bond fund, they should ask themselves whether they want to buy through an intermediary or do it themselves. If they go the DIY route, look at the lowest-cost share class, says Jacobson. Find a reasonably sized asset manager with a good history in the bond market. Morningstar’s senior principal of fixed-income strategies gives this tip: Don’t just chase the highest-yielding fund. It can be really tempting, but in this case, more yield tends to come with more risk. Targeting what’s at the top could lead you to the riskiest thing available.

Dan Lefkovitz, strategist for Morningstar Indexes, examines what a Treasury-heavy bond market means for investment portfolios. Watch this episode of Investing Insights for ideas on how to generate steady income this year. Check out Morningstar’s Guide to Fixed-Income Investing to learn strategies to protect and stabilize your portfolio.

Securities mentioned in this episode:

Vanguard Total Bond Market ETF BND

Vanguard Total Bond Market Index VBMFX