Thought about moving into active fixed income ETFs? The new year could offer an appealing opportunity to dive in. With fixed income rounding out a strong year, 2025 could continue to see fixed income allocations play an important role. That said, uncertainty looms. Active fixed income ETFs often come up when considering options in bonds or debt securities. But what’s the real reason to move out of active mutual funds or passive fixed income ETFs?
See more: 2025 Global Market Outlook: Active International Equities ETF Appeals
At first glance, one might think the benefits of transparency and tax efficiency alone might be motivating active mutual fund investors to invest in ETFs. While those benefits are present, they don’t tell the whole story. Indeed, the real reason investors should consider active ETFs is the degree of scrutiny active management can bring to fixed income offerings.
While index funds provide the simplicity of investing and waiting, fixed income is anything but simple. Active fixed income ETFs can outperform fixed income indexes by assessing each offering for credit quality and appealing fundamentals. Where index funds must comply with their creators’ weights and bureaucracy, active ETFs can act more quickly. With rates coming down over the last few months and potentially continuing to drop despite some lingering inflation and fears about longer-term debt, active ETFs could stand out.
Active Fixed Income ETFs & 2025
Homing in on scrutiny, however, we revisit a key factor when considering bonds and debt offerings: credit quality. For example, a firm like T. Rowe Price can lean on its fundamental research capabilities to dig into credit quality with greater scrutiny than passive managers often can. Fundamentals-driven investing can often look to the future when passive funds typically don’t.
Consider an analysis from T. Rowe Price that reminds investors that passive fixed income ETFs often lack individual security research. Default and issuer risk rises when investors just buy a passive basket of bonds.
With all that said, perhaps the most powerful way to use active fixed income ETFs is to combine different strategies. Thanks to their tradability and relative ease of use, ETFs can be combined to craft a diversified approach to fixed income allocations. For example, one might combine a high-yield fund like the T. Rowe Price U.S. High Yield ETF (THYF ) with a tax-limiting muni ETF like the T. Rowe Price Intermediate Municipal Income ETF (TAXE ).
The former charges 56 basis points to actively invest in high-yield bonds, which often require close scrutiny given their lower-rated credit. Meanwhile, TAXE charges just 24 bps to actively invest in intermediate-term maturity muni bonds. Together, those funds offer just two examples of how active fixed income ETFs can bring all-important fundamental research to bear in scrutinizing debt offerings.
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