The Fed will announce yet another decision on rates this week, with markets largely expecting the central bank to stand pat. While the Fed could buck those expectations, rates will likely not shift more than 25 basis points (bps) if at all. Still, even a non-decision impacts how markets react and what the fixed income landscape looks like. A Fed rates decision either way may invite investors to consider once more the potential of active fixed income.
See more: Three Income ETFs to Watch Amid U.S.-Iran Volatility
Active fixed income can jumpstart bond portfolios in periods of low volatility and offer resilience in periods of high volatility. For example, even if there weren’t the myriad conflicts around the world right now, active fixed income ETFs would stand out significantly relative to passive alternatives due to their flexibility. When bonds default or are called in early, passive funds replace them very slowly compared to actively managed bond ETFs.
Fed Rates Decision Watch: Active Offers Advantages
Consider, too, how active management empowers asset managers to more closely scrutinize issuers. With factors like rising government debt, an unwinding Yen carry trade, potential skyrocketing oil prices, and more on the horizon, debt issuers may be under more and more pressure. Active management can separate the wheat from the chaff when it comes to issuers, measuring fundamental metrics like cash flow, for example.
Other macro trends can speak to the case for active fixed income, as well. Tight spreads make active scrutiny a strong consideration. What’s more, a steepening yield curve offers plenty of complexity for investors that experienced, seasoned active managers can help unravel. With decreasing fees for many active ETFs, such active bond ETFs can even play core roles in bond portfolios.
The T. Rowe Price QM U.S. Bond ETF (TAGG ) presents one notable example. The fund charges eight bps to actively invest in bonds with broad maturities. Funds like TAGG present potent options for investors to consider for those above reasons, especially as the interest rate outlook continues to shift. Rather than just make moves for each individual Fed rates decision, adding active fixed income could raise the level of baseline flexibility for investor portfolios long term.
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