While passively managed fixed income exchange-traded funds remain popular with investors, they come with challenges. So, more fixed income investors are turning to actively managed bond ETFs to take advantage of the crucial ways in which these vehicles differ from their passive counterparts.
T. Rowe Price’s global head of ETFs, Tim Coyne, and fixed income investment specialist, Franco Ditri, argues in a blog post that the three main challenges of passive ETFs are that true index replication is nearly impossible, passive strategies often lack the flexibility to adapt to changing market environments, and there’s an absence of individual security research and analysis in passive fixed income ETFs.
Active ETFs, on the other hand, can offer the potential to outperform fixed income benchmarks and indexes. “By seeking to avoid bonds with looming credit issues and owning those with more attractive fundamentals, our actively managed ETFs seek to deliver meaningful alpha for fixed income investors—and this potential for cumulative outperformance over a benchmark can add up over time,” the authors write.
Another advantage that active funds provide is that careful security selection may offer liquidity and quality analysis discretion. Instead of owning thousands of bonds to replicate the holdings of an index, active stock pickers can be more discerning regarding security selection. An active strategy emphasizing higher-quality bonds with favorable liquidity profiles could help investors looking to avoid some of the pitfalls of passive bond strategies.
The authors of the piece also argue that T. Rowe Price combines multiple approaches into a comprehensive analytical process, using fundamental, macro, and quantitative analyses for its actively managed portfolios.
For each security, T. Rowe Price performs a bottom-up evaluation that digs into a company’s current financials, prospects, and industry trends. At the same time, the firm’s macro analysis focuses on how economic variables could affect both individual securities and the wider fixed income market. Finally, its quantitative team creates models and rules-based approaches used in the active management of bond portfolios.
As part of its active ETF lineup, T. Rowe Price offers a suite of actively managed ETFs the T. Rowe Price QM U.S. Bond ETF (TAGG ), the T. Rowe Price Total Return ETF (TOTR ), and the T. Rowe Price Ultra Short-Term Bond ETF (TBUX ).
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 a modest amount of outperformance over the index.
TOTR, meanwhile, 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 be able to respond to a wide variety of market conditions.
TBUX invests in a diversified portfolio of shorter-term investment-grade corporate and government securities, asset-backed securities, and bank obligations. Invests at least 80% in bonds and all the securities purchased by the fund will be rated investment grade at the time of purchase.
T. Rowe Price has been in the investment business for over 80 years. Their active management is done through rigorous firsthand field research, utilizing risk management analysis, led by experienced portfolio managers carrying an average of 22 years of experience.
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