Yet again, the Federal Reserve’s battle to tame inflation has hit a speed bump. This week’s jobs report came in surprisingly strong, and while it may see revisions, it’s yet another point toward a lengthening rate cycle. The key point for market watchers and investors, however, is that markets are in for continued uncertainty around potential additional rates. Such a scenario continues to speak to the case for active ETFs, which can adapt quickly and with more freedom than indexed strategies.
Markets, which had earlier this year been considering the possibility not of a rate pause, but of cuts, have now turned around toward discussing the potential of one or even multiple hikes to end 2023. Credit markets are now starting to feel the lagging effects of the last 12 months of hikes, true. That doesn’t take into account the impact of further hikes.
The uncertainty created by the split between Fed and market fear and decently positive data could point to active ETFs. Active ETFs have already had a pretty strong year in 2023, picking up interest from institutionals as well as retailers. They’ve also, by some metrics, already outperformed some passive strategies, nimbly moving in and around a top-heavy market.
Active ETFs and Rate Cycle Uncertainty
Moving forward, the continued battle between the Fed and inflation may continue to foster an uncertain environment where active ETFs can prove useful. Active investing leans on experienced managers who often have fewer restrictions investing than passive approaches.
Should that uncertainty harm a given sector, like expensive, overconcentrated tech, active ETFs may be better positioned by relying on fundamentals. They also may arrive into such a situation better diversified than passive strategies that face significant concentration risk. In a year in which just a few firms have driven more than 75% of the S&P 500’s growth., that could play a big role.
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