Fixed Income Active ETFs Take Larger Market Share

A combination of new rules by the Securities and Exchange Commission (SEC) and rising demand for fixed income ETFs is helping this proliferation. Whether they’re seeking broad exposure to the bond markets or more targeted exposure, investors can draw from various funds that cater to a specific strategy.

Due to differences in the way bond markets work compared to stocks, fixed income indexers face portfolio replication and tracking error challenges not shared by their ubiquitous equity peers. Some ETF providers hope to address these challenges through actively managed bond strategies.

According to a Financial Times article, “the adoption of new rules by the US Securities and Exchange Commission in 2019 has made it easier for actively managed ETFs to be launched.”

The number of actively managed funds has been growing at double the rate of the broad ETF market. Since the start of 2021, over 60% of the new fixed income ETFs that have hit the market have been actively managed.

“Since then, a wave of ETFs, often developed by smaller asset managers, has flooded the market,” the article adds. “Actively managed ETFs allow providers to distinguish themselves by their particular bond-selection strategies.”

“And they also allow their managers to generate bigger profits: the average fee among US actively managed bond ETFs is about 0.5 per cent, according to Morningstar, compared with 0.3 per cent for passive indexed funds,” the article says.

With various actively managed options available to help investors navigate the tricky fixed income market, there is a pair of options from T. Rowe Price to consider.

To help mitigate rate risk amid rising inflation, investors can also opt for an actively managed fund that focuses on short-duration debt. One such actively managed ETF is the T. Rowe Price Ultra Short-Term Bond ETF (TBUX).

TBUX seeks high levels of income that are consistent with low volatility of principal value by investing primarily in investment-grade, short-term securities. The fund’s fact sheet shows that the portfolio’s dollar-weighted effective maturity is generally expected to be 1.5 years or less.

Even with an actively managed portfolio built on fundamental analysis, TBUX can still deliver a competitive 0.17% expense ratio.

One all-inclusive option for core investment-grade U.S. bond market exposure with an active twist is the T. Rowe Price QM U.S. Bond ETF (TAGG). TAGG is managed to deliver a similar exposure and risk profile of the Bloomberg U.S. Aggregate Bond Index, but with a goal of outperformance through active security selection.

The portfolio seeks to identify, address, and capitalize on inherent structural problems faced by indexed fixed income portfolios. At a low-cost level typically reserved for passive-only strategies, this actively managed ETF carries an expense ratio of only 0.08%.

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