With inflation data weighing heavy on the capital markets, an active management strategy to help navigate the fickle bond markets while getting yield is a must.
This is where getting expert management is of great benefit to investors who don’t want the added responsibility of managing their own investments. An ETF like the actively managed T. Rowe Price QM U.S. Bond ETF (TAGG) puts a bond portfolio in the hands of proven professionals.
The volatility that investors have been seeing as of late is more than enough reason to hand the keys to the bond portfolio over to a pro. TAGG essentially does all of that in a dynamic investment vehicle of an ETF.
TAGG seeks to outperform the Bloomberg U.S. Aggregate Bond Index. The index is broadly diversified, containing a mix of investment-grade, fixed income instruments that have varying maturity dates.
The obvious skew is towards U.S. debt, with Treasury notes comprising the majority of holdings. As of February 4, the top holding (9% of the fund’s allocation) is Treasury notes that mature in 2026.
The fund comes with a 30-day SEC yield of 2.4% (as of December 31, 2021). The fund will also typically include U.S. government and agency obligations, corporate bonds, mortgage- and asset-backed securities, and U.S. dollar-denominated securities from foreign issuers.
The advisor generally invests in a way that creates a similar risk profile to the index but will use quantitative modeling (QM) and fundamental research to outperform the index. This means that sometimes the fund can be overweight or underweight compared to the index.
When investors think of active management, the immediate thought process is to scream “expensive.” However, TAGG carries an annual expense ratio of just 0.08%.
Potential Choppiness Ahead
Capital markets are well aware of the choppiness that economic data can bring. That said, forthcoming inflation data will certainly add an extra dose of volatility to the bond markets.
This is where an active management strategy can shine. The ability of a fund manager to maneuver the markets and adjust the debt holdings as necessary to optimize performance is a key benefit of active management.
“We could potentially get a very difficult number to digest next week on the inflation front and that has the potential to cut the markets off at the knees,” said Jack Ablin, chief investment officer at Cresset Capital Management.
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