Active management has had a big 2023 so far, with investors and advisors alike upping their interest in active strategies. The active ETF narrative has focused on equities, yes, but investors and advisors shouldn’t forget active’s role in fixed income. Active ETFs have had a significant role to play in fixed income, taking in a notable chunk of new flows. Passive fixed income ETFs face some structural challenges with index replication due to the way the bond markets trade. But active ETFs have more flexibility and can adapt to market changes. With the Fed raising rates once again, an active fund like the ultra-short-term ETF TBUX may be one to watch.
Whether the Fed has just one or more 25 basis point (bps) hikes in their plans, the yield curve offers some intriguing opportunities. Specifically, investors and advisors may want to redouble their focus on the front end of the curve. An ultra-short-term focus can provide that exposure, with yields higher than 5% commonly available on the front end.
Why an ultra-short-term ETF? Ultra-short bond funds traditionally invest in fixed income instruments with maturities of less than one year. Ultra-short-term ETFs normally have more leeway in going after higher yields, boosted even further by an active remit. That allows management teams to leverage their expertise in the ultra-short-term bond landscape.
The T. Rowe Price Ultra Short-Term Bond ETF (TBUX) has pulled in $56 million over the last month in net inflows. It’s risen above $100 million in ETF AUM over the last month and is set to hit its three-year anniversary next year. That, along with some solid tech chart action and the yield curve, may make an even stronger case for its active approach.
TBUX actively invests in investment-grade fixed income securities with durations of 1.5 years or less. It invests in a range of corporate, government, mortgage-backed, and money market securities, overweighting shorter-duration offerings. TBUX charges 17 bps, returning 3.1% YTD. TBUX currently offers a 5.5% 30-day SEC standardized yield and may be worth watching for those looking for an active route into the front end of the yield curve.
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