Last year was decent for most passive, broad-based fixed income strategies. Helped by several interest rate cuts by the Federal Reserve — the central bank’s first in four years — the widely followed Bloomberg US Aggregate Bond Index gained 1.3%.
With the Fed signaling plans to lower rates multiple times this year and amid a groundswell of enthusiasm for the combination of active management, fixed income, and ETFs, the ALPS/SMITH Core Plus Bond ETF (SMTH ) could be an ETF to watch in 2025.
Its status as an actively managed fund could prove beneficial in the year ahead. That’s because some bond market participants have concern the Fed’s easing plans could be stunted by President-elect Trump’s deployment of trade tariffs. Those tariffs would likely be inflationary. They could potentially move the Fed away from rate reductions and back toward a hawkish stance. Time will tell if that scenario plays out. But SMTH could be the ounce of prevention bond investors need in 2025.
Sizing Up SMTH's 2025 Utility
Actively managed strategies such as SMTH could also prove beneficial to income investors this year as the yield curve continues to erase inversion. That’s a scenario in which short-term bonds sport higher yields than longer-dated counterparts.
Another advantage offered by SMTH is that as an actively managed answer to traditional, passive aggregate bond strategies, the ALPS fund can have more flexibility. That includes the potential to increase (or decrease) exposure to corporate debt. That’s a corner of the bond market that could be a leadership group in 2025.
“Corporate bond yields are also likely to stay within a defined range as well, money managers say. Strong corporate earnings and low risk of recession mean corporate yields are unlikely to rise substantially due to fear of defaults, but as corporate bond valuations are close to historic highs, there’s little room for yields to fall,” noted Morningstar analyst Gabe Alpert.
Adding to the allure of SMTH’s corporate bond exposure, which is investment-grade, is that spreads are currently low. That implies there’s value in corporates. That’s particularly so when active management can swiftly capitalize on those opportunities.
“The valuation on corporate bonds is measured by how much a corporate bond offers in yield over a Treasury of equivalent [duration. That’s] a measure of how sensitive a bond is to interest-rate changes,” added Alpert. “At year-end, investment-grade corporate bond spreads are at [0.82%. That’s] close to historic lows, according to the Federal Reserve Bank of St. Louis Economic Data. By comparison, spreads spent most of 2022 and 2023 between 1% and 1.5%.”
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