I keep running into people who are almost cult-like in their devotion to index funds.

That devotion actually makes sense in one very specific place.

Large-cap U.S. equities - where:

• Markets are deep and liquid
• Information is quickly arbitraged
• Indices are reasonably efficient representations of the asset class

Fixed income is the opposite.

Bond markets are fragmented, opaque, and driven by mechanics most index funds completely ignore.

There are multiple well-documented sources of excess return in fixed income:

• Short volatility - Mortgage-backed securities are the clearest example. Borrowers own the prepayment option; lenders are compensated for taking that negative convexity.
• Carry - Earning income simply by holding higher-yielding parts of the curve.
• Roll-down - Price appreciation as bonds age down a steep yield curve.
• Liquidity - Off-the-run bonds often out-yield on-the-run issues. Avoiding newly issued bonds alone can add return over full cycles.
• CDS basis - At times, using credit default swaps instead of cash bonds provides incremental yield pickup for the same credit exposure.

These are not secrets.

They’re structural features of bond markets.

None of them come free and each has:

• Specific risks
• Periods of underperformance
• Drawdowns when conditions move against you

But over long horizons, they tend to work—and compound.

That’s what PIMCO refers to as structural alpha.

And on top of that, experienced managers may add value through:

• Credit selection
• Curve positioning
• Off-benchmark exposures that passive vehicles can’t implement

Index funds are an excellent tool.

Just not a universal one.

Passive equity investing ≠ passive bond investing.

Different markets. Different mechanics. Different opportunity set.

I’m not saying any specific fund is right or wrong for you—talk to your own advisor.

But if you’re treating fixed income like equities and defaulting to passive exposure, you’re likely leaving return on the table.