The Fed’s looming decision to cut rates has many investors looking to their fixed income allocations. Bonds sometimes come across as a bit less exciting than equities, and for good reason, as their role is often used as a stabilizing force for many portfolios. That doesn’t mean it’s OK to accept disappointing bond index performance. Rather, investors should look for edges where they can find them, and for fixed income, that edge is active investing.
See more: Eyeing Tax-Exempt ETFs? TAXE’s Active Approach Stands Out
Rate cuts present a notable opportunity to refresh fixed income allocations with an active edge. Simply relying on bond index performance may not be able to exploit a shifting landscape as well as active. Of course, even if rates were to stay the same, active would be able to stand out. That’s because on a fundamental level, bond index approaches struggle to maintain their stated allocations. When bonds in an index are called early, for example, index funds may not respond quickly enough to keep weights where they need to be.
Bond Index Performance: Lagging Active?
What’s more, active investing can outdo bond index performance thanks to managers’ insight and ability to lean on fundamental research. Active managers can scrutinize bond issuers more deeply, which can really matter for segments like high-yield bonds. Bond index performance can disappoint, then, where active can stand out.
T. Rowe Price’s Head of Global Fixed Income and CIO Arif Husain discussed the topic of active fixed income on a recent webcast hosted by VettaFi Head of Research Todd Rosenbluth.
“I think it is a strongly held view; passive in fixed income is plain dumb,” Husain said. “You are guaranteeing you are going to lose money. Passive in the Agg will lose you a handful of basis points, pretty much guaranteed each year. If you’re willing to guarantee to underperform, fill your boots, go do some passive.”
The issuer offers a variety of active ETFs focused on bonds. The T. Rowe Price QM U.S. Bond ETF (TAGG ), presents one option therein. The strategy charges a very low 8 basis point fee to actively invest in investment-grade bonds with broad maturities. It has indeed outperformed the Bloomberg Agg, outpacing it by more than 30 bps on average over the last three years in excess of fees and expenses.
Looking long term, active can boost a bond portfolio. Whether now to adapt for shifting rates, or later, active can help investors get more from debt. For those looking to active fixed income strategies that can outperform bond index performance, TAGG may appeal.
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