Sterling Capital Enhanced Core Bond ETF (SCEC)

Sterling Capital Enhanced Core Bond ETF is an actively managed fixed-income fund that aims to beat the broad bond market by selectively choosing between Treasuries, corporate bonds, and mortgage-backed securities. The fund’s manager, Sterling Capital, runs roughly 70 percent of the portfolio along the same duration as the Bloomberg Aggregate Bond Index while using the remaining flexibility to express views on which credit sectors are attractive.

The core insight behind the fund is that broad bond indices sometimes misprice credit risk. An index rebalances mechanistically: if a company issues a billion dollars of new debt, that bond gets added to the index weight whether it is fairly priced or overvalued. An active manager can refuse to buy that bond at the issue price if it seems expensive, or can load up on corporate debt from sectors where yields are attractive relative to risk. This is the traditional thesis for active bond management.

SCEC holds roughly 80 percent investment-grade credit — bonds from companies with strong balance sheets and steady cash flows — and 20 percent government bonds. Unlike a broad core bond fund, SCEC avoids the largest corporate borrowers and instead hunts for smaller names where the market may misprize yield. The fund’s average maturity sits around five years, giving it moderate interest-rate sensitivity. A 1 percent rise in rates typically costs the fund about 5 percent in value; a 1 percent decline in rates adds roughly 5 percent.

The fund’s yield is materially higher than the broad index because it owns more corporate debt and fewer ultra-safe Treasuries. That higher yield is the source of potential outperformance: if credit spreads stay wide (or widen further), corporate bonds outpace government bonds, and SCEC wins. If spreads narrow sharply — if investors’ fear of default falls away and corporate bonds re-rate up to Treasuries — SCEC loses some of that advantage.

The manager rotates between sectors based on fundamental views. In 2023 and 2024, for instance, when some investors worried about bank stability, a manager might have underweighted bank debt and favored bonds from utilities or consumer staples. This is where active management either adds value or destroys it. If the manager is right about which credits will outperform, those tactical moves amplify returns. If the manager is wrong, they drag performance below the index.

The fund charges roughly 0.35–0.50 percent annually, meaningfully higher than a passive broad bond fund like SCCR but not unreasonable for active management. The hurdle is that the manager must add back this extra cost through better stock selection. In many years, bond markets are so calm and spreads so stable that no amount of active selection beats the index after fees. In other years — during credit crises or sharp yield-curve rotations — active managers can shine by being defensive in the right way.

SCEC trades on exchanges and can be bought and sold at its net asset value with minimal spreads. The fund is suitable for investors who believe active bond management can add value, who are comfortable with the higher fees that entails, and who want exposure to investment-grade bonds with a tilt toward credit selection rather than pure indexing.

Monitoring the fund requires watching two things. First, compare its returns to the Bloomberg Aggregate Bond Index and to passive broad bond funds. Over three-year and five-year periods, has the manager outperformed enough to justify the extra fees? Second, track credit spreads — the extra yield that corporate bonds pay above Treasuries. When spreads are wide (high yield on corporate bonds relative to Treasury bonds), corporate-heavy strategies like SCEC should outperform. When spreads are tight, the manager’s extra fees are pure drag. If spreads tighten sharply and SCEC lags significantly, that is not necessarily evidence of poor management; it reflects the structural disadvantage of owning more credit when credit is expensive.

The fund includes interest-rate risk, credit risk, and manager selection risk. Interest-rate risk affects all bonds — rates up, prices down. Credit risk is the chance that a bond issuer defaults, though this is mitigated by the focus on investment-grade names. Manager selection risk is that the active manager simply makes poorer choices than a passive index.