Hello, YieldAlley readers! In this issue:

⚡️ If the US Has to Build Data Centers, Here’s Where They Should Go (Wired)

🌟 Gold is the Safest Money (Ray Dalio)

2️⃣ Two Paths for the American Economy (Larry Swedroe)

📈 The Myth of the Stock-Picker’s Market (Morningstar)

🤖 A Trend Following Deep Dive: AI, Agents and Trend (Man)

Bond data tells an uncomfortable story for passive investing purists. In bond markets, 42% of actively managed funds survived and beat their average passive peer over the past decade. Compare that to large-cap US stocks, where only 8% of active managers cleared the same bar.

The stock market operates on centralized exchanges with continuous price discovery. Apple trades the same whether you buy through Vanguard or Fidelity. Every transaction feeds into a single, transparent pricing mechanism.

Bond markets work nothing like this.

Most bonds trade over-the-counter through dealer networks. A 2021 Morningstar study of 350,000 bonds found that 57% were held by only one asset manager. Just 23% were held by more than three institutions. When you need to buy or sell, you're often negotiating in a market with limited participants and opaque pricing.

This fragmentation creates opportunities that don't exist in equity markets. A skilled bond manager can exploit pricing inefficiencies, access hard-to-trade securities, and navigate illiquid markets in ways that index funds simply cannot replicate.

Vanguard Total Bond Market (BND) and iShares Core US Aggregate Bond (AGG) each hold over $100 billion and charge just 0.03%. Over the past decade through 2024, BND returned 1.90% annually.

However, both funds hold roughly 45% in US Treasuries. That massive Treasury weighting creates drag. Treasuries are the safest bonds available, which means they offer the lowest yields.

Active managers have exploited this weakness. Fidelity Total Bond (FBND) charges 0.36%, twelve times more than BND, yet returned 2.88% annually over the same period. That's nearly a full percentage point of annual outperformance, even after fees.

The difference compounds brutally. A $100,000 investment in BND grew to approximately $121,000 over ten years. The same investment in FBND reached roughly $133,000. That's $12,000 of real wealth created simply by accepting slightly higher fees for active management.

Many investors chase yield by loading up on high-yield bonds, bank loans, and emerging market debt. Morningstar tested this with an "Adjusted Income Portfolio" that yielded 5.3% annually since late 2013. Despite that attractive yield, it returned just 4.25% annually and underperformed a basic 60/40 stock/bond portfolio by 3.5 percentage points. During the 2022 downturn, the high-yield allocation became a major detractor when it was supposed to provide stability.

The smarter approach involves investment-grade corporate bonds. iShares Broad USD Investment Grade Corporate Bond (USIG) returned 4% annually since 2007 compared to BND's 3%. The 12-month yield averaged 3.3% versus 2.7% for BND. That's an extra 60 basis points from holding creditworthy companies instead of Treasuries, without catastrophic drawdown risk.

This is also where active management shines. High-yield bonds trade infrequently, and credit analysis matters enormously. Almost half of actively managed high-yield funds beat their passive peers over fifteen years. An index must include the largest issuers, which are often the most indebted companies. Active managers can skip the disasters.

Municipal bonds present similar opportunities. The muni market has over one million individual bonds, many held by single institutions. Mortgage-backed securities require managing prepayment risk and convexity. These complexities favor active management.

Short-term Treasuries trade in enormous volume with transparent pricing. There's no edge to extract. Vanguard Short-Term Treasury (VGSH) charges 0.03% and delivers Treasury yields with minimal friction.

The same applies to TIPS, which adjust mechanically for inflation. Schwab US TIPS (SCHP) charges 0.03% and captures the inflation-adjusted yield efficiently. In these categories, active management adds cost without value.

For core bond exposure, consider active management. Fidelity Total Bond (FBND, 0.36%), JPMorgan Core Plus Bond (JCPB, 0.38%), or iShares Total Return Active (BRTR, 0.38%) have demonstrated the ability to outperform Treasury-heavy indexes.

For enhanced income without excessive risk, use investment-grade corporates. iShares Broad USD Investment Grade Corporate Bond (USIG, 0.04%) or Vanguard Intermediate-Term Corporate Bond (VCIT, 0.03%) deliver meaningfully higher yields while maintaining credit quality.

For Treasury and TIPS exposure, use passive funds.

For specialized exposures like high-yield or municipal bonds, active management makes sense. JPMorgan Income (JPIE, 0.39%) offers multisector flexibility with strong results.

Market structure determines where active management can add value.

Stocks trade on exchanges with continuous price discovery and massive liquidity. Most active equity managers add no value after fees because the market is too efficient to beat consistently.

Bonds trade over-the-counter with fragmented ownership and opaque pricing. Many active bond managers add genuine value because the market structure creates exploitable inefficiencies.

The data shows active bond management works more often than active stock management. Not because bond managers are smarter, but because bond markets are less efficient.

That difference should matter to how you allocate your fixed income portfolio.

Government Money Market Funds (7-Day Yields)

Brokered CD Rates (6-Month Rate)

ETFs (30-Day Yields)

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Link to offer here

This promotion provides an accessible entry point to experience cutting-edge autonomous vehicle technology that represents the future of urban transportation. Waymo's self-driving vehicles use advanced sensor arrays, machine learning, and real-time mapping to navigate city streets without human intervention, technology that has logged millions of autonomous miles. For DashPass members already paying for delivery convenience, this creates a low-friction opportunity to test rides that were science fiction a decade ago. If you're in one of these three markets and curious about autonomous vehicles, this removes the barrier to trying what may become routine transportation within years.