Active Fixed Income UCITS ETFs: Tracking Error, Total Expense Ratio, and Liquidity Advantages

Gone are the days when investors had to rely on costly closed-end funds (CEFs) that often traded at significant discounts or premiums to their net asset value (NAV).

Today, the UCITS (Undertakings for the Collective Investment in Transferable Securities) ETF structure has revolutionised investing by making it easier to lower total expense ratios (TER) and tracking errors (TE).

TER represents the annual costs of running a fund, expressed as a percentage of assets under management, while TE measures how closely an ETF tracks its benchmark index.

The ETF creation/redemption mechanism is central to achieving these efficiencies. By allowing market participants to create or redeem ETF shares directly in-kind, this mechanism keeps prices aligned with NAV and fosters healthy competition among market makers, further driving down costs.

What’s particularly impressive is how this innovation extends to traditionally less liquid areas of the investment universe—like fixed income. Fixed income markets, often perceived as challenging for transparency and liquidity, now benefit from the efficiencies of the ETF structure.

As a result, active fixed income UCITS ETFs are becoming more affordable and liquid by the day. This evolution is paving the way for broader accessibility to actively managed strategies in this space. Here’s a look at three options from AXA IM.

U.S. investment-grade bonds

For investors seeking exposure to U.S. investment-grade bonds, AXA IM’s USD Credit PAB strategy exposure is worth considering.

The strategy approach allows for seamless compounding, which should enhance total returns over time without requiring manual reinvestment.

It has an active mandate that focuses on investment-grade corporate bonds issued in the U.S. domestic market. In addition, it aligns with a decarbonisation trajectory in line with the carbon emissions of the ICE U.S. Corporate Paris-Aligned Absolute Emissions Index, which serves as its benchmark.

The sector composition  aims to be balanced, with industrial and financial issuers each making up a significant portion of the holdings. The credit quality of the strategy is virtually all investment-grade, with the majority of its bonds rated either BBB or A.

U.S. high-yield bonds

For investors willing to accept lower credit ratings in exchange for potentially higher total returns, the AXA IM’s US High Yield exposure could be an appealing alternative.

This strategy shares many similarities with its investment-grade counterpart however the key difference lies in its portfolio composition.

The majority of the bonds in this strategy are rated B and BBB, with a smaller proportion rated CCC. These ratings reflect a higher level of credit risk compared to investment-grade securities but also come with the potential for higher yields and total returns.

Additionally, the sector breakdown differs significantly. While the investment-grade counterpart leans heavily on financials and industrials, this high-yield strategy offers a more diverse range of exposures.

Its holdings include debt from companies in sectors such as media, services, healthcare, energy, and technology, providing broader diversification across industries.

European investment-grade bonds

Fixed income investors looking to diversify beyond adjusting credit ratings or maturities can explore opportunities beyond U.S. bonds by shifting their focus geographically.

The Euro-denominated bond market presents a compelling alternative, offering exposure to distinct risk and return drivers such as varying interest rate environments, currency fluctuations, and Europe-specific economic conditions.

One option in this space is the AXA IM’s Euro Credit PAB strategy. Like its U.S. counterparts, this actively managed approach integrates ESG considerations while maintaining a low tracking error relative to its benchmark—the 100% ICE Euro Corporate Paris-Aligned Absolute Emissions Including Transaction Costs Index.

Focusing on investment-grade exposure, the strategy primarily holds bonds issued by financial and industrial companies, mirroring the sector allocation seen in its USD equivalent.

As expected, the overall credit quality of this strategy is consistent with investment-grade standards, with the majority of holdings rated BBB and A.

For investors seeking diversification across geographies while maintaining high credit quality, this strategy aims to provide a cost-efficient and actively managed entry point to the European bond market.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.

Important information

No assurance can be given that AXA IM’s investment strategies will be successful. Investors can lose some or all of their capital invested. These strategies are subject to specific risks including, but not limited to: equity; emerging markets; global investments; investments in small and micro capitalisation universe; investments in specific sectors or asset classes, volatility risk, liquidity risk, credit risk, counterparty risk, derivatives risk, legal risk, valuation risk, operational risk and risks related to the underlying assets. Some strategies may also involve leverage, which may increase the effect of market movements on the portfolio and may result in significant risk of losses. 

Disclaimer

This marketing communication does not constitute on the part of AXA Investment Managers a solicitation or investment, legal or tax advice.

Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document / scheme documents, which provide full product details including investment charges and risks. The information contained herein is not a substitute for those documents or for professional external advice.

The products or strategies discussed in this document may not be registered nor available in your jurisdiction. Please check the countries of registration with the asset manager, or on the web site https://www.axa-im.com/en/registration-map, where a fund registration map is available. In particular units of the funds may not be offered, sold or delivered to U.S. Persons within the meaning of Regulation S of the U.S. Securities Act of 1933. The tax treatment relating to the holding, acquisition or disposal of shares or units in the fund depends on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly encouraged to seek advice from its own tax advisors.

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In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.