Active Bond ETF Solutions for Today's Tricky Market Conditions

As we consider the current bond market trends, investors can turn to actively managed bond ETF solutions that could be better suited in a more volatile environment.

In the recent webcast, Active Fixed-Income Answers to Tight Monetary Policy, Andrew McCormick, head of fixed income at T. Rowe Price, helped paint the picture of a slowing economic outlook ahead, with leading economic indicators already weakening. Meanwhile, inflation remains elevated as American consumers face stubbornly sticky prices for both goods and services, despite the recent dip in headline inflation indicators.

Nevertheless, after the extended sell-off following the Federal Reserve’s aggressive monetary policy stance, McCormick argued that investors can find value in some areas of the markets, such as the high yield and leveraged loans categories, which exhibit much more attractive price points and yield opportunities.

Timothy Coyne, head of exchange traded funds at T. Rowe Price, highlighted the importance of actively managed strategies, especially in the fixed income asset class. For example, looking at the ETF universe, active ETFs only represent 4% of total ETF assets under management, making up $325 billion of the total ETF industry. Meanwhile, fixed income represents 42% of active ETF AUM, and the fixed income class only makes up 19% of the total ETF AUM.

Coyne explained that there are challenges with trying to replicate fixed income indexes due to the large and complex investment universe, high turnover rates that increases costs, other associated costs and complexities, and minimum trade size requirements.

Consequently, Coyne argued that this is where active managers can add value to fixed income investments. Active managers have the ability to take advantage of market inefficiencies, factor in ESG considerations and curve positioning, and access the best ideas. They provide access to the broader investable universe where market inefficiencies tend to abound, and they have the ability to selectively invest in off-benchmark securities.

The management team is able to construct and position portfolios to better align with market views, quickly reposition, and take advantage of compelling entry points. They also have access to valuable market insights and assets at attractive prices and quantities. Given the asymmetric risk associated with defaults (i.e., upside capped at par, downside is unlimited), an active approach offers enhanced ability to screen out issuers most likely to default. Lastly, they offer the enhanced ability to customize solutions to better meet client needs.

For example, T. Rowe Price offers an actively managed bond ETF suite, including the T. Rowe Price Total Return ETF (TOTR), the T. Rowe Price Ultra Short-Term Bond ETF (TBUX), the T. Rowe Price QM U.S. Bond ETF (TAGG), the T. Rowe Price U.S. High Yield ETF (NYSE Arca: THYF), and the T. Rowe Price Floating Rate ETF (NYSE Arca: TFLR).

TAGG seeks to provide a total return that exceeds the performance of the U.S. investment-grade bond market. It uses its modest tracking error budget to seek to outperform the Bloomberg U.S. Aggregate Bond Index on a net-of-fee basis. The fund is managed by Robert Larkins, who has 18 years of investment experience, all at T. Rowe Price.

TOTR seeks to maximize total return through income and, secondarily, capital appreciation. It combines all-weather portfolio construction techniques with tactical market insights to generate income and attractive risk-adjusted returns across market cycles. The fund is co-managed by Chris Brown, who has 21 years of investment experience, 16 of which have been at T. Rowe Price, and Anna Dreyer, who has 12 years of investment experience, all at T. Rowe Price.

TBUX seeks a high income level consistent with low principal value volatility. It intends to provide a high level of income while minimizing principal volatility by using a broadly diversified portfolio composed of shorter-term government, investment-grade corporate, and securitized bonds. The fund is managed by Alex Obaza, who has 16 years of investment experience, 13 of which have been at T. Rowe Price.

THYF is designed to primarily provide a concentrated yet balanced portfolio focused on the traditional U.S. high yield bond investment opportunity set. THYF seeks to provide total return and, secondarily, current income by investing primarily in U.S. dollar-denominated high yield corporate bonds and other fixed- and floating-rate corporate securities. The fund is led by Kevin Loome and uses the same process as mutual fund T. Rowe Price U.S. High Yield Fund (TUHYX).

TFLR seeks high current income and, secondly, capital appreciation by investing primarily in BB- and B-rated loans, which the fund’s portfolio manager believes are likely to keep volatility at below-market rates over time. It is broadly diversified across 200–300 issuers. The ETF’s strategy is constructed similarly to that of mutual fund T. Rowe Price Floating Rate Fund (PRFRX), investing primarily in floating-rate loans and other floating-rate debt securities. The strategy uses a disciplined approach to credit selection, featuring research and risk control. Paul Massaro, head of the global high yield team and portfolio manager of the floating-rate strategy, manages the fund.

Financial advisors who are interested in learning more about the fixed income market can watch the webcast here on demand.