Being Selective in the Universe of Bond ETFs

Moreover, many of the aggregate bond funds that were so beloved in previous economic environments may be leaving investors without adequate income and/or inflation protection. In other words, selectivity is now paramount in the fixed income universe.

“Indeed, even seemingly small differences in markups can mean giving up hundreds, if not thousands, of dollars in total returns over time. And with prices and yields fluctuating to the degree they have recently, it pays to shop around,” according to Charles Schwab research.

For investors new to the bond market, other obstacles need to be cleared, including getting a handle on bond pricing, how bonds transact, and which corners of the market can endure rising rates and inflation, among other topics.

“The problem stems from the fact that bonds don’t trade on centralized markets like stocks, which makes their true cost difficult—if not impossible—to ascertain. Instead, most are purchased ‘over the counter’ through a brokerage firm that buys the bond on your behalf,” adds Schwab. “The firm then tacks on a fee, or markup, that can range from a fraction of a percent to several percentage points, depending on factors such as bond liquidity and the firm executing the trade.”

One way of looking at these potentially trying times for bond investors is that it may just be a good time to consider active management. In fact, save for emerging markets debt, active bond managers did an admirable job of beating their benchmarks in the first half of 2021. The same could not be said of their equity-oriented counterparts.

While index-based bond strategies are confined to the benchmark’s stated objectives, active managers can capitalize on credit opportunities, which are crucial to generating income in today’s climate. Likewise, active fixed income managers can steer investors away from low-yield, rate-sensitive government debt while allocating to other segments designed to survive and thrive while rates are low.

Fortunately for investors, the universe of active fixed income ETFs is expansive and it’s slated to add some more compelling options. For example, T. Rowe Price recently released plans for the T. Rowe Price Total Return ETF, T. Rowe Price QM U.S. Bond ETF, and T. Rowe Price Ultra-Short Term Bond ETF.

For more news, information, and strategy, visit the Active ETF Channel.