Bond Funds Are Supposed to Be Better Than Indexes. Not This Year.

Bond managers have struggled to navigate tariff-related market turmoil, according to Morningstar. Photo: Michael M. Santiago/Getty Images

Actively managed bond funds are having a terrible year. Despite their frustrating travails, the funds still represent a solid option for income-focused investors.

Investors have more than $4 trillion invested in active bond funds—which, historically, have a far better chance of delivering market-beating returns than active stock-picking funds. That’s thanks to the extra complexity of bond markets and index funds’ heavy helpings of conservative government bonds.

Recently however, active bond funds have been taking it on the chin. Just 31% of active bond funds outperformed comparable index funds for the 12 months ended June 30, according to a report released Tuesday by Morningstar. That’s down from around 62% of funds that accomplished the key goal a year ago.

Just over half—52%—of intermediate core funds outperformed index funds, down from more than 70% a year earlier, Morningstar found. But funds that focus on corporate bonds saw performance almost completely crater. Just 4% outperformed passive funds—down from 64% a year ago.

What gives? Bond managers struggled to navigate tariff-related market turmoil, according to Morningstar analyst Bryan Armour.

“Actively managed bond funds tend to take more credit risk than indexed peers…that worked against them in April 2025, when credit spreads widened amid tariff announcements and increased geopolitical risk,” he wrote. “In the corporate-bond category, for example, active managers appeared to cut credit risk as spreads widened only to miss the rebound when they narrowed again in May and June.”

Despite the rough patch, active bond funds still offer an attractive proposition. Their average long-term performance remains solid. And investors can significantly improve their odds when they focus on funds with low expense ratios.

Over the past 10 years, intermediate-term bond funds returned 2.1% a year on average, compared with 1.7% for the passive funds, according to Morningstar. The figures are on an asset-weighted basis, which counts performance of bigger funds more heavily. Funds in the lowest 20% by expenses, did even better, returning 2.4%. YES

To be sure, only about one-third of individual active intermediate bond funds outperformed passive ones over the past 10 years, but the rate jumped to more than two-thirds among the cheapest funds.

Morningstar’s study doesn’t single out individual funds, but it isn’t hard to find active bond funds with reasonable expense ratios and strong long-term track records—especially since the largest mutual funds by assets often boast low costs.

Among funds with top 10-year returns in Morningstar’s database: the $10.4 billion Fidelity Investment Grade Bond Fund , with an expense ratio of 0.44% and 2.31% average annual return, and the $94 billion American Funds Bond Fund of America , with an annual fee of 0.24% (available to investors many retirement plans) and a 10-year return of 2.31%.

Write to Ian Salisbury at ian.salisbury@barrons.com