After decades of declining interest rates acting as a tailwind for earnings and profits, investors are now facing an uncertain economic environment where analysts predict low-to-nonexistent corporate profits. According to FactSet, analysts are projecting earnings growth of 3.4% and 10.1% for Q3 and Q4, respectively. For all of 2023, analysts predict earnings growth of 2.5%.
Although these expectations aren’t in line with a typical recession — which would be down between 10% and 30% — this is still flat-to-anemic growth at best. And while this suggests that Wall Street doesn’t think that earnings have bottomed out, it does mean that we’re entering a market cycle in which being able to identify companies with strong competitive positions, pricing power, and cash flows will be both increasingly important and more difficult.
So, whether markets enter a recessionary period (as many are predicting) or if markets just enter an extended period of sluggish growth, index funds will no longer cut it for investors seeking outsized returns. That’s where active management can come into play.
If passive management is like putting your car on autopilot, then active management is giving the manager the ability to grab the wheel.
While passive strategies lack the flexibility to adapt to changing market environments, active ETFs can offer the potential to outperform benchmarks and indexes. Plus, active managers with greater resources and greater scope benefit from economies of scale, which can often translate to better returns.
“Active managers have the flexibility to take advantage of market volatility and add to favored positions when prices become more attractive,” said Todd Rosenbluth, head of research at VettaFi.
“Active ETFs are really starting to grow and become a more prominent part of the market,” said Tim Coyne, head of ETFs at T. Rowe Price.
T. Rowe Price has been in the investing business for over 80 years through conducting field research firsthand with companies, utilizing risk management, and employing a bevy of experienced portfolio managers carrying an average of 22 years of experience.
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