While passively managed fixed income exchange-traded funds are popular among investors, they come with many potential challenges. In addition to true index replication being nearly impossible, passive strategies often lack the flexibility to adapt to changing market environments. Not to mention, individual security research and analysis are absent in passive fixed income ETFs.
On the other hand, actively managed ETFs differ in several key aspects from their passive counterparts. According to a white paper from T. Rowe Price, more investors are turning to these active ETFs to address their fixed income investment needs.
As opposed to passive strategies, actively managed ETFs offer the potential to outperform fixed income benchmarks and indexes. And this potential for cumulative outperformance can add up over time.
Plus, careful security selection may offer both liquidity and efficiency. Rather than owning thousands of bonds to replicate the holdings of an index benchmark, active ETF portfolio managers can be more discerning regarding security selection.
Another advantage that active ETFs provide is that they can combine multiple approaches into a comprehensive analytical process. T. Rowe Price performs a bottom-up evaluation for each security in its active funds that dig into a company’s current financials, future prospects, and industry trends. The issuer’s macro analysis focuses on how economic variables could affect individual securities and the broader fixed income market. Finally, its quantitative team creates models and rules-based approaches used in the active management of bond portfolios.
T. Rowe Price has three actively managed fixed income ETFs that could form the core of an investor’s fixed income allocation:
The T. Rowe Price QM U.S. Bond ETF (TAGG) seeks to exceed the performance of the Bloomberg U.S. Aggregate Bond Index, a common measure of the domestic investment-grade bond market. The portfolio manager selects a set of U.S. dollar-denominated bonds representing key benchmark traits while attempting to generate modest outperformance over the index.
The T. Rowe Price Total Return ETF (TOTR) invests in a diversified portfolio of bonds and other debt instruments. The fund has considerable flexibility in pursuit of strong portfolio returns and is constructed to respond to various market conditions.
The T. Rowe Price Ultra Short-Term Bond ETF (TBUX) invests in a diversified portfolio of shorter-term investment-grade corporate and government securities, asset-backed securities, and bank obligations. A broadly diversified, multi-sector short-duration bond strategy that offers higher income potential beyond traditional cash investments.
“Investors have long appreciated T. Rowe Price’s commitment to strategic investment management based on sound fundamental research and actively managed portfolios,” the paper’s authors wrote. “Now, investors can access the benefits of our global resources and investment experience through our suite of active fixed income ETFs. After all, why settle for matching a benchmark when you could try to exceed it?”
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