In contrast, passive index-based bond funds that track widely observed benchmarks like the Bloomberg Barclays U.S. Aggregate Bond Index have close to 40% in Treasuries and almost 30% in MBS securities, which may leave investors exposed to increased risks in a rising rate environment.
As investors look to rebalance their portfolios in a changing market environment, Sterne advised to look at the duration of holdings or the sensitivity to changes in interest rates on their fund portfolio. If investors are wary of rising rates, they can consider shorter duration bond funds, like FLTB, to limit rate risk.
Related: Why Consider an Active Bond ETF Strategy Now
As active products, the ETFs can freely change their exposures as indicated by the analysis of their portfolio management and research teams. These insights enable the portfolios to take advantage what the team believes to be the best opportunites in a given market.
Moreover, unlike stocks, individual debt securities are typically “over the counter,” where price movements are less driven by a number of investors trading on a public exchange, and many don’t even trade on any given day. This may cause inefficiencies in pricing, which may leave room for more informed and skillful active managers to add alpha or performance.
For more information on the fixed-income market, visit our bond ETFs category.