It’s the ultimate “will they, won’t they” dynamic. Waiting for the Fed to cut rates can feel like it lasts forever, especially in such uncertain times. After a year in 2024 that saw rate cuts boost portfolios tremendously, inflation has remained stubborn just as market volatility has risen significantly. The waiting game, of course, is a core part of investing for many advisors and clients. Those looking to act now, and make portfolios more responsive and agile, however, may want to consider active investing.
See more: Nearing $1 Trillion: Active ETF Engine Roars On
Active investing via ETFs has grown in popularity in recent years. The ETF wrapper has itself become much more popular since the arrival of the ETF rule in 2019. In just the last few years, however, actively managed ETFs, specifically, have picked up major AUM. Active ETFs have become much more common, too, among new launches.
That may owe to the combination of benefits active ETFs provide. ETFs themselves provide transparency and tax efficiency advantages over mutual funds. What’s more, their tradability as securities makes them an intriguing vehicle.
Add in that active investing, and those advantages are multiplied. An active ETF can, for example, move with greater flexibility than a passive ETF can as conditions change. At the same time, unburdened by index rules, those ETFs can also look to fundamental screens to identify firms they can lean into while seeking outperformance.
It’s that active investing flexibility and tax efficiency that could help portfolios be more responsive to events like a Fed rate cut. Were the Fed to cut rates, an active ETF can forgo an index fund’s limits on sector exposure and lean into certain categories. Some active ETFs with bottom-up portfolio construction can identify firms that only need a catalyst like another rate cut to leap forward.
Taken together, active ETFs could prove a worthwhile add in the satellite role in portfolios. Whether a fundamental, bottom-up active ETF or a sector-driven active fund, the space offers some exciting opportunities that merit consideration.
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