Fixed income Investing: Active Versus Passive Investing

Tim Musial, CFA
February 25, 2020

Active managers have certain tools at their disposal that can manage risk.

When we talk about the differences between active and passive investing, the conversation almost always revolves around equities. And while some arguments used for equities are the same for fixed income, there are notable differences, which tilt the advantage toward active investing.

Our fixed income investment team wrote an article highlighting the differences between active versus passive fixed income investing. In the article, they discuss the inherent weaknesses of the most commonly used fixed income benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index. They show how the benchmark’s shortfalls can become opportunities for enterprising active managers seeking to generate excess returns and manage risk.

The shortfalls include:

  • Limited sector exposure
  • Increased credit risk due to market value weighting
  • Duration that fluctuates with issuance

Two Ways an Active Manager Can Add Value

  1. Expanding the Investment Universe
    While the Bloomberg Barclays U.S. Aggregate Bond Index (the Agg) is huge, the entire fixed income universe is even bigger.

    The Agg, which has a market value of more than $23 trillion, represents roughly half of the fixed income universe, according to the Securities Industry and Financial Markets Association. This means there are a lot of potential investments out there that are excluded from the index, such as below investment-grade corporate bonds, floating rate debt and non-agency mortgage backed securities—which could represent opportunities for active managers.
  2. Actively Managing Risk
    Passive investing may increase exposure to issuers with higher leverage, declining credit quality or substantial interest rate risk. Whereas, active managers can focus on the most compelling opportunities.

    Active managers have more tools at their disposal and can manage risk by using rigorous credit research, adjusting sector allocations and managing duration exposure to minimize the impact from changing interest rates.

To learn more about the differences between active and passive fixed income investing, read our article Active Vs. Passive Fixed Income Investing or contact your CIBC Private Wealth advisor for more information about our fixed income investing capabilities and how we can help you protect and growth your wealth.


Tim Musial is a fixed income portfolio manager for CIBC Private Wealth Management with more than 20 years of experience. His role includes contributing to the firm’s fixed income portfolio strategy, analysis and trading of both taxable and tax-exempt bond investments.