Fixed income may be back in play with the return of a live rates market over the last few years, but how best should investors approach the space? Fixed income allocations, intended to go a different way from equities, offer more complications than equities do in many ways. Navigating those particularities may call for active investing and active management. Active ETFs can help securitize finicky debt offerings while also navigating rate moves.
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It may help to first consider how passive ETFs approach bonds. Crafting an index of debt securities can appear like a no-frills option at first, but looks can deceive. Consider how oftentimes bond indexes weight their holdings by outstanding debt. That can obfuscate other important factors in a way that market cap weights don’t. Total debt does not speak to credit risk in a complete way.
The bond world contains numerous inefficiencies on both the client end and the issuer side. For clients, overreliance on risk aversion can lead to picking too many bonds, or less productive options. On the issuer side, as with the debt weighting, a lack of easily comparable information about issuers can make passive portfolio construction challenging.
Active management tends to do well in inefficient market segments like fixed income. Active ETFs can provide transparency and tradability to that inefficient space. What’s more, the active management aspect can provide deep research capabilities. Seasoned managers, with years of experience in the space, can offer closer scrutiny than passive ETFs.
T. Rowe Price offers a variety of active ETFs that look at fixed income. The T. Rowe Price Total Return ETF (TOTR), for example, charges 31 basis points for its approach. It looks for offer diversified exposure to U.S. fixed income while maximizing total return. For investors looking at fixed income, active ETFs may provide one potent tool set worth examining.
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