Will the Fed make one more rate cut to end 2024? One more cut would top off what has been a very positive fall for rate cut hopefuls considering how long the Fed waited. As those cuts continue to reverberate throughout the market and further out into the broader economy, investors will want to seek out the best opportunities. Active investing can potentially outperform simple, passive funds in doing so entering 2025 with its adaptability and use of fundamental research.
See more: VettaFi Fixed Income Symposium Asks, Why Turn to Active ETFs?
While a passive investing approach can appeal for its simplicity and tendency toward inertia, expecting steady growth, markets don’t always work that way. Indeed, when looking for upside, or for the flexibility needed when events occur that undercut widely held assumptions, active investing can step up.
For example, as yet another rate cut arrives, investors will expect a broad positive response. The speed of that response across the market may well vary, however. Does tech have significantly more runway for growth in the new year? What subsectors might benefit from rate cuts more than others? What do rate cuts mean for fixed income? Does all of this qualify for a soft landing scenario that gives investors permission to take more risks?
Active managers don’t necessarily know the answer to those questions right now, but what they can do is adapt. Active funds and ETFs often lean on fundamental research to engage in bottom-up portfolio construction. Without regard for strict, slow-to-change index rules, active managers can find securities best positioned for upside in the new year. They can also avoid areas that may not offer the best value.
It’s that responsiveness and in-depth, fundamentals-driven investing that can help with events like rate cuts. The reliance on strong fundamental research helps avoid fool’s-gold opportunities. At the same time, the active flexibility can help with a surprise like a rate cut or the failure for a rate cut to appear.
A strategy like the T. Rowe Price Value ETF (TVAL) offers an example of an active investing ETF for such a circumstance. Charging just 33 basis points, the fund actively invests in large-cap names meeting value standards. Looking ahead, active investing can continue to offer potent opportunities, especially if rate cuts hit.
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