The Sterling Capital VAULT: Passive Investing is NOT Static Investing

The proliferation of benchmark tracking funds in the investment world has led to one large misnomer: passive investing. While definitions vary, the most common form of passive investing is purchasing a fund that mimics an underlying index and holding for longer time horizons. It is easy to see how the word passive can become conflated with static or stable allocations. However, if the asset itself changes materially over time, how passive is it really?

To illustrate the point, look no further than one of the largest and most commonly used benchmarks in the fixed income space - the Bloomberg U.S. Aggregate Bond Index. Consider a scenario in which an investor purchased an exchange-traded fund (ETF) that simply mimics the characteristics of this index (i.e., a passively managed ETF) in 2005, this ETF is the investor’s only holding, and for 20 years the investor does not adjust their holdings. Does the risk profile of the investor’s portfolio change over time?

On the surface, our investor has maintained 100% passive exposure to the U.S. fixed income market. While the passive allocation has been constant, the market index it tracks has been anything but. Since it is a rules-based index, any bond that meets the inclusion criteria is added to the universe, and as sector issuance ebbs and flows, the asset allocation mix and characteristics of the index reflect those changes over time. Comparing the index changes over the holding period highlights just how much the “passive” investments have shifted.

Shifting 'Passive' Index Characteristics of Bloomberg U.S. Aggregate Bond Index

RHS: right-hand side. Chart and textual data is as of 11.30.2025. Sources: Bloomberg L.P.; Sterling Capital Management Analytics.

Without touching anything, the asset allocation mix of the underlying holdings changed meaningfully over the years. The portfolio’s drift is not contained to just asset allocation as the characteristics of the index it mimics have also changed over time. In simplistic terms, a bond or portfolio’s duration is a measurement of price sensitivity to changes in interest rates. In 2005, the option adjusted duration of the Bloomberg U.S. Aggregate Bond Index was 4.16. By 2025, the duration lengthened substantially to 6.06, making the portfolio more sensitive to interest rate moves, again without the account lifting a finger!

Passive investing may seem simple, but it carries hidden risks. As market conditions change, a passive fund’s risk profile can shift without investors realizing it, leading to unintended exposures. Active management, by contrast, continuously monitors and adjusts to mitigate these risks. In fixed income, where risk is inherently asymmetric, understanding risk exposures on a standalone basis and in relation to other holdings is critical to avoid unintended risks and ultimately protect the end investor.

Past performance is not indicative of future results. Any type of investing involves risk and there are no guarantees that these methods will be successful. Economic charts are provided for illustrative purposes only. The information provided herein is subject to market conditions and is therefore expected to fluctuate.

The opinions contained in this presentation reflect those of Sterling Capital Management LLC (SCM), are for general information only, and are educational in nature. The opinions expressed are as of the date of publication and are subject to change without notice. These opinions are not meant to be predictions and do not constitute an offer of individual or personalized investment advice. They are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. All opinions and information herein have been obtained or derived from sources believed to be reliable. SCM does not assume liability for any loss which may result from the reliance by any person upon such information or opinions.

Investment advisory services are available through SCM (CRD# 135405), an investment adviser registered with the U.S. Securities & Exchange Commission (SEC) and an indirect, wholly-owned subsidiary of Guardian Capital Group Limited. SEC registration does not imply a certain level of skill or training, nor an endorsement by the SEC. SCM manages customized investment portfolios, provides asset allocation analysis, and offers other investment-related services to affluent individuals and businesses.

SCM does not provide tax or legal advice. You should consult with your individual tax or legal professional before taking any action that may have tax or legal implications.

The volatility of an index varies greatly. All indices are unmanaged and investments cannot be made directly in an index.

The Bloomberg U.S. Aggregate Bond Index is an unmanaged index composed of securities that are SEC-registered, taxable, and USD-denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. It is not possible to invest in the Bloomberg U.S. Aggregate Bond Index, which is unmanaged and does not incur fees and charges.

Bloomberg L.P. Information: “Bloomberg^®” and the Bloomberg indices are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by Sterling Capital Management LLC and its affiliates. Bloomberg is not affiliated with Sterling Capital Management LLC or its affiliates, and Bloomberg does not approve, endorse, review, or recommend the product(s) presented herein. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to the product(s) presented herein.

Technical Terms: the technical term below is sourced from Corporate Finance Institute.

An Exchange-Traded Fund (ETF) is an investment fund that holds assets such as stocks, commodities, bonds, or foreign currency. An ETF is traded like a stock throughout the trading day at fluctuating prices.

About the Authors

Gregory Zage, CFA^®

Head of Fixed Income Trading

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Gregory Zage, CFA^®, Executive Director, joined SCM in 2007 and has investment experience since 2007. Gregory is a Senior Fixed Income Portfolio Manager and Head of Fixed Income Trading. He is currently responsible for all trading activity across SCM's fixed income desks. Previously at SCM, he was responsible for high-grade corporate credit trading and municipal credit trading. Gregory received his B.A. in Economics with a minor in Spanish from Davidson College. He holds the Chartered Financial Analyst^® designation.

Justin Nicholson

Fixed Income SMA Portfolio Manager

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Justin Nicholson, Director, joined BB&T Asset Management in 2002 and SCM through merger in 2010. He has investment experience since 2002. Justin is a Fixed Income SMA Portfolio Manager. Justin received his B.S. in Business Management from North Carolina State University.