The Fed may have spent the last several months balking at cutting rates too soon amid stubborn inflation data, but rate cut advocates may finally have gotten the signal they wanted. Fed Chair Jerome Powell signaled a September cut on August 22, boosting market confidence. For many investors, that brings some positivity to their equities portfolios, but it may also invite fresh eyes to bonds. With a rate curve change potentially in the offing, it may be time to consider an active bond ETF.
See more: Active Bond ETF TAGG Up $1 Billion YTD
As investors are likely well aware, it’s worth considering added duration in times of falling rates. When rates fall, bonds with higher yields locked in for longer periods offer more than the bonds issued at weaker rates. While that’s a straightforward part of fixed income investing, the bigger question is how to approach that shift.
An active bond ETF could provide a helpful solution. Adding duration to portfolios is one thing, but finding the best opportunities therein is another. Active offers notable advantages for any fixed income strategy, given the challenge of maintaining duration when bonds may need to be rolled over or are called early. More than that, however, active management can help identify the issuers they believe to be of the highest quality.
A fund like the T. Rowe Price QM U.S. Bond ETF (TAGG ) may be able to fill that role. TAGG charges just eight basis points (bps) for its active approach. The strategy invests in U.S. dollar-denominated bonds with the aim of maintaining intermediate-to-long term maturity. Its managers look for mortgage and asset-backed securities, agency obligations, investment-grade corporate and government debt, and more. It leans on both fundamental research and quantitative research in assessing opportunities.
Together, that has helped the active bond ETF offer a 4.76% yield to maturity to investors, according to T. Rowe Price data. For its own performance, the strategy has returned 4.8% YTD, according to ETF Database data. That has outperformed both its ETF Database Category and FactSet Segment averages. Taken together, the active bond ETF’s provision of duration and active outperformance makes it a notable candidate for a potential rate cut cycle.
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