Are Active Managers Homing In on Ultra-Short Bond ETFs?

Actively managed fixed income products are a huge piece of the fast-growing space of active financial management.

Drilling down further, a specific segment of the bond market is ripe with potential for issuers of active ETFs: ultra-short term bonds. Several big-name fund issuers already offer ultra-short term bond ETFs, several of which are actively managed, and in today’s low rate environment, it’s reasonable to expect other issuers will try their hands at this asset class.

For advisors and clients, that could be a positive, because ultra-short term bonds offer better yields than money markets and less volatility than short-term bonds. Plus, there are regulatory elements of the money market realm that could make active ultra-short term fare more attractive for advisors and clients.

“The SEC in early February requested comment on potential changes to regulation of money market funds due to heavy withdrawals from U.S. prime money market funds — which invest in short-term company debt, including commercial paper — and from tax-exempt money market funds in March 2020,” reports Bernice Napach for Think Advisor. “Heavy withdrawals exacerbated liquidity shortages in the fixed income market, which was ultimately rescued by the introduction of Federal Reserve liquidity facilities.”

As of the end of the first quarter, there was $98.5 billion in ultra-short term ETFs, of which $56 billion was allocated to active strategies, according to Think Advisor. That’s confirmation that demand is there for the combination of active management, the ETF structure, and ultra-short term fixed income instruments.

Moreover, there was $246 billion in ultra-short term bond mutual funds, notes Napach. If ETF issuers, as they are famous for doing, undercut mutual fund rivals on fees, flows from those mutual funds to comparable ETFs could build.

Whether or not that’s the impetus isn’t clear, but what is obvious is that some well-known fund giants are looking to get in on the ultra-short term bond ETF act. For example, T. Rowe Price recently filed plans for three active bond ETFs, including the T. Rowe Price Ultra-Short Term Bond ETF.

That fund will feature short-term investment-grade corporate and government debt. It will be eligible to allocate to mortgage and municipal bonds as well.

For more news, information, and strategy, visit the Active ETF Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.