Active investing has taken a big leap over the last few years, with active ETFs a popular alternative to mutual funds for many investors. Both active equities and active fixed income ETFs have gathered significant attention. Active fixed income ETFs, specifically, have taken a big leap this year compared to equities, per new research from JP Morgan. That could owe to some particular advantages inherent to active fixed income ETFs.
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According to JP Morgan research, active fixed income funds have seen their inflows more than double since 2019. That year, active fixed income ETFs saw 15% of total active ETF inflows. On a YTD basis this year, that number has grown to 32%, mainly at the expense of active equity ETFs. Whether that gap comes from many investors already moving out of equity mutual funds or from a spike in fixed income mutual funds moving to ETFs, it’s clear actively managed fixed income ETFs made a jump.
Funds that invest in fixed income actively provide some real advantages over mutual funds, which could help draw mutual fund investors out of that wrapper. ETFs provide greater transparency and tax efficiency, which could matter quite a bit, especially for investors nearing retirement.
Active Fixed Income ETFs This Year
What’s more, if those mutual funds are passive, they are already at a disadvantage compared to active mutual funds and ETFs. Active management can really set itself apart when it comes to bonds. With varying expiration dates and important timing in rolling bonds, active management can bring the flexibility and experience that passive funds don’t always offer.
The T. Rowe Price QM U.S. Bond ETF (TAGG ) presents one interesting example among active ETFs. The fund will hit its three-year ETF milestone this month by charging a very low fee for active ETFs of only 8 basis points. Through its active management mandate, TAGG is poised to capitalize on the structural disadvantages of passive fixed income investments. The strategy’s active approach, seeking to outperform the Bloomberg U.S. Aggregate Bond Index while leaning on T. Rowe Price’s active management experience, could make it one to watch as active fixed income picks up steam.
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