Factor Exposure Analysis of Fixed Income ETFs

What is driving the risk & return of bond strategies?

June 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Factor exposure analysis can be used in fixed income as easily as in equities
  • More variables improve the explanatory power of the model
  • However, it also can make the interpretation challenging


Running a factor exposure analysis is a core element of the due diligence process for equity-focused mutual funds, and increasingly ETFs, especially actively managed ones. The holy grail is to find fund managers that generate outperformance that is not explained by equity factors, ie alpha. If excess returns can be explained by factor exposure, then the capital allocator can simply pick a smart beta ETF with the same factor exposure at a lower cost.

However, although it has the same relevance, a factor exposure analysis is slightly less frequently used when evaluating fixed income strategies. Perhaps this is explained by bonds seeming to be more complicated than equities. There is only one type of equities, compared to several types of fixed income instruments that range from convertible debt to senior loans.

Furthermore, there is less consensus on how to define factors in fixed income than in equities. Although there are no exact standards on how to calculate the value or quality factors for stocks, most researchers look at the academic work of Fama-French for guidance. There is no equivalent standard for fixed income (read The Complexity of Factor Exposure Analysis).

In this research note, we explore some of the practical questions when running a factor exposure analysis for fixed income strategies.


We select 10 actively managed fixed income ETFs traded in the US, of which the oldest has a track record going back to 2009. The management fees range from 0.35% to 1.13%, and the cumulative assets under management are $48 billion.

The strategies are quite diverse and provide exposure to low-risk short-term US government bonds as well as riskier high yield bonds. The performance over the last five years highlights the diversity as the total return ranges from 3.9% to 20.1% (read