Why Index Fund Giant Vanguard Is Pushing Actively Managed Bond Funds
The $11 trillion in assets manager has shifted its recommended allocations to 70% fixed income. It now has more than $1 trillion in funds committed to bonds.
In investing’s age-old active versus passive debate, nobody was a bigger proponent of passive index fund investing than Vanguard’s late founder Jack Bogle, who insisted that paying active managers hefty fees in an efficient market eats away at investors’ returns. Passive investing has long been a religion at Valley Forge, Pennsylvania-based Vanguard, and legions of “Bogleheads” have built their retirements using this north star. However, when it comes to fixed income, the firm Bogle founded is taking a much different tack.
In 2025 alone, Vanguard has launched four new actively-managed bond ETFs, adding to its menu of 66 active bond funds. Its active fixed-income assets amount to $1.1 trillion of the firm’s $11 trillion in assets—though a large portion of that sum includes low-risk money-market funds that are considered actively managed—second only to BlackRock’s $1.2 trillion in this category. Its nine active bond ETFs, which have all launched since 2021, hold more than $10 billion in assets.
And while Vanguard may not be thought of as a hub for Wall Street bond whizzes like Jeffrey Gundlach’s DoubleLine Capital or PIMCO, its performance has been hard to match. According to Vanguard, 44 of its 48 active bond funds with a 10-year history outperformed their peer group averages.
“The fixed income market, certainly relative to the equity market, is much more complicated, oftentimes much more inefficient, and certainly less liquid,” says Michael Chang, head of high-yield portfolio management at Vanguard. “That’s the type of environment where if you know what you’re doing, there’s potentially a lot more value to be added via active management.”
While it’s a straightforward task to put stocks in a market-cap weighted index like the S&P 500 at virtually no cost, bonds are far more fragmented. S&P Global has dozens of indices carving out different segments of the asset class like an aggregate bond index measuring investment-grade debt, a high-yield index, indices tracking inflation-linked bonds, corporate or municipal bonds and more. It would be nonsensical to pack every type of bond into a single bond index fund, so Vanguard decided to launch its multi-sector bond mutual fund (VMSAX) in 2021, following it with the Multi-Sector Income Bond ETF (VGMS) that launched this May.
The two funds have accumulated $400 million in assets, and VMSAX’s three-year annualized return is 7.8%, slightly beating its benchmark—an assemblage of several Bloomberg bond indices with varying weights—which has posted a 7.3% three-year average annual return. The fund currently has a yield of 5.06%.
Even in actively-managed funds, Vanguard hasn’t discarded its low-cost reputation. The multi-sector bond ETF comes with a fee of 0.30% of assets under management, higher than Vanguard’s firm-wide average ETF and mutual fund expense ratio of 0.07% but lower than the peer group average of 0.92% for multi-sector bond funds. For Vanguard, which has popularized passive equity investing so much that there are plenty of competitors offering no-cost or even zero-cost stock index funds, this is the next frontier in offering lower costs than others.
“They lean into Vanguard’s low cost structure when they’re managing the funds,” says Jeff DeMaso, founder and editor of the Independent Vanguard Adviser. “They’re not taking really big bets on interest rates or loading up on the riskiest bonds out there to try and juice yield.”
The effect of fees or “expense ratios” gets amplified when bond returns have lagged stock returns by so much for the last decade. The 10-year annualized return for the S&P U.S. Aggregate Bond Index is a paltry 1.93%, and while Vanguard can claim a small degree of outperformance in its Core Bond Fund since inception in 2016 (2.01% vs.1.67% annually), the real test of the value added by its active managers could come in the next decade.
The Fed’s expected interest rate cuts could boost bond prices, all while hype around AI has made the stock market historically expensive. Vanguard is beefing up its fixed income lineup at the same time its research team is nudging investors in the direction of bonds. Its “time-varying” asset allocation model, meant to build a model portfolio for investors with a risk tolerance suitable for a standard 60/40 allocation under normal circumstances, recommended a 70% allocation to bonds and just 30% in stocks in its latest quarterly update.
Vanguard’s prognosticators expect such a portfolio would have a 5.5% expected annualized return for the next 10 years, compared to a 5.2% average annual return for a benchmark 60/40 portfolio, and will outperform with much less volatility. The model goes further into which categories of bonds it recommends, suggesting more long-term Treasurys, which tend to appreciate more during rate declines, than short-term bonds in the portfolio, for example.
“Investment-grade bonds, and particularly longer-term treasuries, tend to provide the most ballast if you have a correction in the equity market,” says Todd Schlanger, senior investment strategist at Vanguard. “Given the high valuations and expectation for lower returns in equities, we’re a bit longer duration in fixed income.”
If Vanguard’s customers heed the firm’s advice, it will be up to Chang and his colleagues to decide where the capital goes. Vanguard’s Multi-Sector Income Bond Fund is geared to what he terms credit-focused investments, rather than asset-backed or mortgage-backed securities which are more common in some peer funds but make up less than 10% of Vanguard’s.
The fund owns bonds issued by several telecom companies like CBS Corp., Charter Communications and Univision. Chang explains that out-of-court debt restructurings in the telecom industry amid the instability caused by cord-cutting has made yields attractive in some cases.
“Rating agents don’t tend to look upon these types of situations very favorably, but if you’re willing to roll your sleeves up and think longer-term, there’s a decent amount of value to be had,” he says. About half the multi-sector fund’s portfolio is rated BBB or higher, with the rest below investment grade.
The growth of private credit in the last decade to a $2 trillion market would seem to limit the number of opportunities offered to public debt investors. Chang thinks it has actually made the credit quality of the high-yield market stronger than in prior credit cycles, since private credit firms are typically financing riskier debt, particularly in leveraged buyouts. “As a result, we would not expect default rates to peak as high during the next recession compared to prior cycles,” says high-yield bond chief Chang, noting another bullish factor.
Chang is also eyeing emerging market bonds at the low-end of the investment-grade market or higher-quality high-yield bonds. The fund owns bonds issued by Mexico, Colombia, Oman, Serbia, South Africa and several more nations.
Some of these bonds could wind up in investors’ portfolios in more diversified alternative strategies, too. The prospectus for the first fund stemming from this year’s alliance between Vanguard, Wellington and Blackstone to build products combining public and private markets sets aside 15% to 30% of the fund for Vanguard’s actively-managed bond funds, which Wellington will decide how to allocate. Vanguard chief investment officer Greg Davis boasted of the firm’s “world-class active fixed income team” in the press release announcing the alliance.
Fixed income will never overtake passive indexing as the driving force behind Vanguard’s brand—its biggest fund, the Vanguard Total Stock Market Index Fund, has $2 trillion in assets alone. But the 50-year-old firm’s new focus on fixed income reflects a midlife reinvention that could forecast a shift in major investors’ habits and portfolios if bonds come to the forefront in the years and decades ahead.