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Launched in 2002, fixed income exchange-traded funds (ETFs) have become an increasingly popular option with investors. However, as we have previously noted,1 in certain areas, such as high yield, ETFs have struggled to replicate benchmark returns. In this article, we revisit that comparison, taking into account the volatility witnessed in 2020, to see whether our concerns remain valid.

Figure 1. Gross of fee ETF returns versus Broad Benchmark and Active High Yield Universe



High Yield Index

Median Active
High Yield Universe

























Index: Bloomberg Barclays US Corporate High Yield Index; Source: MercerInsight®
Median Active High Yield Universe; Source: MercerInsight®
High Yield ETF Source: BlackRock, State Street

The returns in the table show that ETFs have underperformed the broad-based high yield index in four of the past five years. In 2020, over the full year, the major high yield ETFs, HYG and JNK substantially lagged during a market inflection point. This happened despite the Federal Reserve announcing support for the sector in April. As shown by the median active high yield universe returns, investors would likely have benefited from allocating to an active high yield portfolio. 

Compared to a traditional active strategy, high yield ETFs have two important distinctions. First, most high yield ETFs do not attempt to replicate the broad-based index used by active funds. This includes HYG and JNK. Instead, they aim to replicate a more liquid slice of the high yield market. Second, most high yield ETFs utilize a passive management approach that aims to replicate the index by purchasing a representative portfolio of bonds, rather than every issue, to help reduce transaction costs.

The performance of institutional high yield passive options serves as a good comparison. Despite coming from the same providers, returns typically improved compared to ETF options. Given that ETFs have daily liquidity and need to continually rebalance to match the index, improved performance for institutional passive vehicles was likely achieved due to the lower amount of flows. Crucially, these characteristics can allow institutional passive vehicle to target a more representative index for high yield.

An additional performance drags come from transaction costs and fees. Fees for the major high yield ETFs, HYG and JNK, are 49 bps and 40 bps,[1] respectively; while fees for the median fee for an actively managed high yield separate account and an institutional mutual fund is 48 bps and 68 bps,[2] respectively. This may surprise some investors who are used to passive ETFs being low cost, such as in equities (3 bps) or investment grade fixed income (4 bps). For comparison, institutional commingled passive options in high yield run around 15 bps.


In our opinion, active management still holds an advantage over passive ETF investing and is the most prudent way to gain high yield exposure. We believe there are inherent benefits in high yield active management due to the market complexity and issuer level idiosyncratic factors that exist within leveraged credit. Active strategies can underweight sectors/issuers in which there are identifiable secular challenges or economic uncertainty, while overweighting sectors/issuers with a high probability for more stable cash flows. Although achieving alpha in high yield can be challenging, investors should be aware that they would be unlikely to capture the index return passively through ETFs or even institutional passive commingled funds. However, if an investor prefers a passive approach, we believe that they can benefit from using an institutional comingled or separately managed vehicle in which the manager can better control the flows and likely have lower fees.


1 Source: BlackRock and State Street; as of 3/31/2021

2 Source: MercerInsight®; Universe: US High Yield; As of 3/31/2021


Daniel Natale 

Fixed Income Specialist

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