Advisors and investors seeking opportunities beyond passive bond benchmarks, or looking to reduce risk, would do well to consider active fixed income ETFs. In the mercurial markets of 2025, strategies that rely on fundamental analysis to construct portfolios while remaining flexible could prove beneficial. T. Rowe Price recently discussed these benefits and more in an insight piece.
Individual Security Selection
Passive strategies are built on benchmarks, with the broadest exposures generally proving most widely held by investors. The Bloomberg U.S. Aggregate Bond Index is the definitive index choice for many bond investors. However, the benchmark bond index contains over 12,600 securities as of mid-June, with exposure to the breadth of the investment-grade U.S. bond market. Passive ETFs that track indexes like the Agg often provide an approximation to industries and securities with varying degrees of risk that all fall within the bounds of the index’s strategy.
Active strategies, on the other hand, generally offer portfolios built from the bottom up. Active managers are able to invest based on an individual security’ fundamentals using research and analysis. They also can take into account the industry, any evolving trends, the macro environment, and more. By understanding an individual security, its performance potential, and its risk profile, active managers can screen for optimal portfolios.
In the case of fixed income ETFs, this means an active strategy can exclude or minimize unfavorably positioned bonds while adhering to the strategy’s mandate. This may mean bonds from issuers at risk of default or with higher credit risk can be screened out. The active bond ETF is then able to eliminate potential drag due to the fundamental analysis used to construct the portfolio.
Outperformance Potential Compared to Passive Peers
The ability to be selective about bond exposures allows active manages to avoid higher risk bonds. These may include bonds with near-term credit concerns as well as those that may be higher risk due to developing macro or economic events. This selectiveness in turn creates alpha potential over passive bond ETFs that include higher-risk and underperforming bonds. As T. Rowe explained, “this potential for cumulative outperformance over a benchmark can add up over time.”
Additionally, the constraints of passive strategies may lead to added risks and missed opportunities across market cycles. As new macro and economic trends emerge, some securities may become less desirable. Within bonds, this could be an event such as an industry suffering from credit deterioration or a sudden change to interest rate outlooks. Because they are not bound to benchmarks, active strategies often provide more flexibility for portfolios. The ability to respond to emerging opportunities while minimizing new risks make them a boon in unpredictable markets.
Invest in Active Fixed Income ETFs With T. Rowe Price
“Investors have long appreciated T. Rowe Price’s commitment to strategic investment management based on sound fundamental research and actively managed portfolios. Now, investors can access the benefits of our global resources and investment experience through our suite of active fixed income ETFs,” wrote T. Rowe Price. “After all, why settle for matching a benchmark when you could try to exceed it?”
T. Rowe Price offers six active bond ETFs to complement or enhance fixed income portfolios. The T. Rowe Price QM U.S. Bond ETF (TAGG ) seeks to outperform the Bloomberg U.S. Aggregate Bond Index. It does so while maintaining a similar risk profile to the Index. The T. Rowe Price Total Return ETF (TOTR ) seeks total return, with income as its first priority, followed by capital appreciation. The strategy invests across a variety of bond and debt instruments and the portfolio is built to be resilient to a number of market environments.
The T. Rowe Price Ultra Short-Term Bond ETF (TBUX ) seeks high levels of income and invests in a diversified portfolio primarily of investment-grade, short-term securities. These include Treasuries and government bonds, corporate bonds, asset- and mortgage-backed securities, municipal bonds, money markets, and bank loans. Meanwhile, the T. Rowe Price Intermediate Municipal Income ETF (TAXE ) seeks high, federal tax exempt income for investors. It does so by investing in intermediate municipal bonds with average maturities between four and 12 years.
The T. Rowe Price U.S. High Yield ETF (THYF ) seeks total returns and current income by investing primarily in junk bonds. These bonds are rated below investment grade, or are perceived to be below investment grade if unrated. Rounding out the active bond suite, the T. Rowe Price Floating Rate ETF (TFLR ) seeks high current income as well as capital appreciation. It does so by investing in floating rate loans and bonds, known as “leveraged loans.” These loans are issued by companies whose balance sheets generally hold a great deal more debt than they do equity.
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