Passive investing has surged in popularity in recent years. However, while fixed-income funds have witnessed a rise in passive, index-tracking strategies, their adoption hasn’t matched the popularity seen in equities markets. This is especially evident when it comes to Asian bonds, where passive options constitute a small 13% of the market by assets under management (AUM) as of end-June 2025; a stark contrast to the US bond fund market, where approximately 43% of fund AUM is passive (Exhibit 1).
In this article, we consider three prominent Morningstar Categories that represent funds with broad Asian fixed-income exposure: Asia Bond, Asia High Yield Bond, and Asia Bond – Local Currency. Within these categories, nearly all passive offerings are structured as ETFs.
Why Have Asian Fixed Income Funds Lagged in Adopting Passive Strategies?
There are a few key reasons why index-tracking passive funds have yet to gain meaningful traction among Asian fixed-income focused funds.
First, unlike in equity markets, actively managed fixed-income funds have generally had greater success in outperforming their passive peers. Morningstar’s European Active/Passive Barometer: Mid-year 2025 showed that active fixed-income funds had a one-year success rate of 50.1% and a 10-year success rate of 29.0%, significantly higher than 29.0% and 13.5%, respectively, for active equity funds. The success rate indicates the percentage of active funds that started the sample period and went on to survive and generate higher returns than passive funds in their Morningstar category over that period. The better success of active fixed-income funds can be attributed to dislocations in many parts of the bond market, particularly within lower-rated segments where active managers can uncover mispriced opportunities. The post-pandemic environment, characterized by heightened monetary policy activity, has also provided a more favorable backdrop for skilled active managers to add value.
Secondly, structural challenges continue to weigh on the viability of index-tracking funds in fixed income. As outlined in Morningstar’s report The Bond Market as Fertile Ground for Active Management, the bond market is marked by inefficiencies such as concentrated ownership of securities, infrequent trading, and the complexity of bond structures (such as senior versus subordinated and secured versus unsecured). These factors complicate pricing consistency and discovery, which in turn makes it challenging to replicate an index. In Asia, these issues are further compounded by the relatively smaller scale of the regional bond market compared to its US or European counterparts.
Lastly, subdued investor demand for Asian fixed-income funds since 2022 has had a knock-on effect on the appeal of Asian bond ETFs. This slowdown has impacted both active and passive funds in the segment. In 2021, both active and passive Asian fixed-income funds saw strong inflows, driven by their appealing yields in a low-interest rate environment. However, fund flows sharply reversed from 2022 onwards (Exhibit 2). The decline in demand was initially triggered by a wave of credit defaults in China’s property sector, which dented investor confidence. At the same time, the risk/reward profile of global bond funds, particularly those benefiting from elevated US Treasury yields, became more compelling to many investors.
Asian Fixed-Income ETFs Are Concentrated Among Few
As a result, investors have been left with limited choices for passive funds -most of which are ETFs – which invest in Asian bonds. For example, there are only two passive offerings each in the Asia High Yield Bond and Asia Bond – Local Currency Morningstar Categories. In both cases, assets are heavily concentrated in a single product: the iShares USD Asia High Yield Bond ETF and the ABF Pan Asia Bond Index Fund each account for over 90% of passive AUM in their respective categories.
The ABF Pan Asia Bond Index Fund initially benefited from the support of 11 central banks across the Asia-Pacific region, stemming from its unique origins as a post–Asian financial crisis initiative to promote long-term local currency bond investment. However, its fund size has largely stagnated over the past decade, reflective of the general trajectory of fixed-income passive products in the region. Even among passive Asian fixed-income funds that have gained some traction, retail participation typically makes up only a small portion of total assets, according to our discussions with the asset management companies.
Takeaway for Investors
When deciding between active and passive strategies in Asian-focused fixed-income funds, investors should weigh the lower fees of passive funds against the potential for active managers to deliver excess returns – with consideration of their associated risks – that justify their higher costs.
In less liquid segments like Asian high-yield bonds, where credit-specific risks are more pronounced, skilled active managers may have greater scope to outperform through careful security selection and risk management.
Even in more conservative strategies, such as Asian bond funds which primarily focus on investment-grade bonds with limited high-yield exposure, active managers can still add value through credit selection and relative value positioning across countries and credit ratings. In both cases, there remains a strong case for active management.
That said, passive investing can be effective in more liquid, higher-quality, and homogeneous parts of the bond market. This includes the Asia local currency bond space, which primarily comprises government bonds. However, active strategies also have merit here, as managers can add value by adjusting country allocations, duration, and currency exposure to take advantage of changing market conditions.
The author or authors do not own shares in any securities mentioned in this article. Find out about
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