Active ETFs have had a strong year once again in 2024, following a breakout 12 months in 2023. The VettaFi Fixed Income Symposium Thursday saw active ETFs stand out over several segments. One specifically addressed the rising role of actively managed ETFs, titled, “Why Turn to Active ETFs?”
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The pair spoke not only to the growing interest in active ETFs, but also their role in fixed income investing. Markets this year are seeing the return of a live interest rate market. As such, investors may be looking for options that offer flexibility. Active ETFs can provide those options. T. Rowe Price’s Larkins addressed the growing interest in active as part of that trend.
“One thing is there has just been more choice than there has been in the past,” Larkins said, responding to Rosenbluth’s question on the growing interest in active ETFs.
“I think that coupled with the market environment as well, we’ve had a pretty dramatic and volatile Fed cycle…some volatility that active management can, in theory, avoid,” he added.
With webinar survey respondents citing fixed income as one of the most popular areas for active, Rosenbluth invited Wrzesniewsky to comment. For Wrzesniewsky, investors’ significant allocations to cash present an opportunity to look to fixed income.
“I think when you look at fixed income, we’ve had a couple of years where maybe people have put their bond allocations on pause and put money in cash,” he said. “There’s a really good opportunity to start to reengage.”
What About TAGG?
Larkins pointed to the T. Rowe Price QM U.S. Bond ETF (TAGG ) as an example of a fixed income active ETF. With expenses lower than many passive ETFs, TAGG charges only eight basis points (bps) to actively invest in USD-denominated investment-grade bonds with a diverse range of maturities.
“TAGG is an example a core building block for high investment grade bonds in many portfolios,” he said.
Per Larkins, TAGG applies three tenets as part of its overall philosophy. First, he said, strategies simply cannot fully replicate fixed-income indices, with tracking error always a problem. Second, he said, indices aren’t necessarily constructed efficiently, with government, for example, significantly overweighed in the Bloomberg Aggregate Bond Index. Third, he noted that fixed income includes a segmented buyer base, with insurance companies, pensions, and others complicating the picture.
“Because there are different buyer bases, there’s some inefficiencies in the market and some technical richness that is always there because people are buying bonds for different reasons,” he said. “So our approach is, rather than trying to minimize the tracking error and be very passive, we set a low tracking error target and then seek to replicate the index characteristics more efficiently.”
Active ETFs can offer some significant appeal in fixed income, with funds like TAGG, which offers a 4.3% 30-Day SEC Standardized Yield. TAGG has returned 12.1% over the last year per T. Rowe Price market performance data. As active ETFs continue to grow, consider their role in a fixed income allocation moving forward.
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