With 2025 in the books, it will be a difficult year to top for fixed income exchange-traded funds (ETFs), but Morningstar is predicting more excitement to come. That should keep fixed income investors fixated on what new developments the space brings this year.
As noted, fixed income ETFs broke records in 2025, amassing strong inflows and seeing a record number of product launches (just shy of 150, according to Morningstar). Active fixed income ETFs, in particular, came to the market en masse as more investors are demanding their fixed income allocation come under the watchful eyes of active portfolio managers.
“Fixed income ETFs experienced growth with flows rising 45% to $437 billion, up from $300 billion in 2024,” FactSet said, further highlighting the demand of fixed income ETFs in a year marked by uncertainty from macro factors like geopolitical tensions and falling interest rates.
2 Morningstar Predictions
Morningstar doled out six predictions for ETFs in 2026, but two stood out with regard to fixed income. Given their current growth rate, Morningstar predicts more market share accumulation for fixed income ETFs in 2026. Bonds have been gaining 2% market share per year on average since November 2015, and once all the math is worked out, this means that bond ETFs could occupy 33% market share by year’s end.
“With more bond ETFs than ever, and more on the way, I think they’ll have an above-average year and claim one-third of the entire bond-fund market by the end of 2026,” said Daniel Sotiroff, Morningstar’s Senior Manager Research Analyst.
Another Morningstar prediction that could feed into more inflows for fixed income ETFs, particularly the short-term variety, is the demand for cash-like investment vehicles. Short-term bond ETFs were an ideal rate-risk mitigation play when the U.S. Federal Reserve was tightening monetary policy to combat inflation, but these days, they’re lauded for their yield. Investors can use them to earn a return on their cash with a yield that’s more competitive than money market accounts.
“As bank-offered interest rates remain very low and bond yields are still relatively high, investors will continue to demand more from their savings, bringing many into short-term bond ETFs,” said Brian Paoli, Morningstar Associate Manager Research Analyst.
Looking Beyond the AGG
In the aforementioned FactSet inflows data, they mentioned that broad-based fixed income ETFs took the lion’s share of flows with $177 billion. For those in the broader-is-better camp, the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND) are two of the tried-and-tested funds ideal for a core allocation.
In line with greater demand for active ETFs, TMX VettaFi Head of Research Todd Rosenbluth noted a few funds in an article late last year for those looking beyond broad-based indexed funds: the Eaton Vance Total Return Bond ETF (EVTR), JPMorgan Income ETF (JPIE), and PIMCO Multisector Bond Active ETF (PYLD). As Rosenbluth noted, they’re also ideal for fixed income investors seeking a fund that can outpace the Bloomberg US Aggregate Index. Because the trio is actively managed, the portfolio managers have the autonomy to adjust holdings as necessary to reflect current market conditions.
With a Fed in flux, having an all-weather solution like active ETFs can be a boon for fixed income investors in a new year that brings excitement, but also more uncertainty.
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