Actively managed exchange traded funds may be better suited than traditional indexing in helping investors better diversify in any type of market environment.

In the recent webcast, Navigating Fixed Income Markets: Market Update and Outlook, T. Rowe Price’s head of fixed income, Andrew McCormick, outlined the current conditions we are facing with the interest rate cycle beginning to shift gears toward hikes ahead after a year of loose monetary policies helped bring the economy back from the coronavirus pandemic-led fallout. McCormick argued that while global stimulus may have peaked, liquidity remains ample for now. Moreover, market observers are now closely watching the Federal Reserve’s policy outlook with many increasing bets that officials will begin hiking next year. Consequently, there is still room for yields to rise or bond markets to continue contracting.

Meanwhile, we are seeing inflation spike with many questioning whether or not this jump will be transitory in nature or persistent. McCormick believes that outliers drove the recent core inflation spike and that inflation could remain short-term in nature.

China’s market has also influenced the global investment outlook. For example, McCormick noted that regulatory interventions remain front and center with an unclear impact on broader business sentiment. The regulatory themes include national security — foreign listings, technology/data security, and technology hardware. In addition, social rebalancing, or the so-called Common Prosperity, has created a focus on rebalancing income from wealthy to middle class to support domestic consumption and address demographic headwinds.

“Policy often has a two steps forward/one step back pattern, but (Evergrande volatility) still implies moving towards a direction,” McCormick said. “We expect current campaigns to dial back but not reverse.”

Meanwhile, in the U.S., corporate America is on solid footing with earnings-per-share growth beating expectations, which has helped support the ongoing stock market rally to record highs. Looking ahead, business investments continue to support an expanding and promising outlook.

McCormick also underscored the long-term benefits of yield generation for fixed income investors. He argued that income has driven long-term fixed income returns and not price appreciation. For instance, about 75% of total returns generated by U.S. Treasuries are attributed to income, and 99% of U.S. high-yield total returns are generated by income.

To help investors better access various markets in our current market environment, head of exchange traded funds, Timothy Coyne, highlighted T. Rowe Price’s new active fixed income ETFs that are based on time-tested strategies already utilized by the money manager.

T. Rowe Price recently announced the addition of three new fixed income exchange traded funds (ETFs) to its actively managed ETF suite, including the T. Rowe Price Total Return ETF (TOTR), the T. Rowe Price Ultra Short-Term Bond ETF (TBUX), and the T. Rowe Price QM U.S. Bond ETF (TAGG).

The new ETFs were selected as core fixed income strategies that can serve as building blocks to a client portfolio. Each will be managed by the same investment team and processes as the existing mutual fund versions with similar strategies, utilizing the firm’s long-standing strategic investing approach, characterized by rigorous research, risk awareness, and independent decision making.

The firm’s lineup of active ETFs complements its traditional mutual fund offerings and delivers key features typically associated with ETFs that some investors may prefer, including continuous daily trading, real-time market-determined pricing, and tax efficiency.

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. TAGG has a net expense ratio of 0.08%.

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. TOTR has a net expense ratio of 0.31%.

TBUX seeks a high level of income consistent with low volatility of principal value. 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. TBUX has a net expense ratio of 0.17%.

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