Revisiting your fixed income sleeve for a new year? Many investors like to kick off a new year with a refresh of their portfolios, and with 2025 only just begun, now may be the time to do so. Following a strong year for active ETFs in 2024, active fixed income, specifically, could provide some real options for a core bond allocation. As a myriad of challenges rise to meet fixed income offerings, swapping out a passive bond fund for an active ETF could help.
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Why look to active for that core bond allocation? 2025 may provide plenty of opportunities for investors, but the rate market remains hard to read. Inflation has dropped significantly but has yet to be fully tamed. Meanwhile, even as the Fed has cut rates, markets continue to fluctuate, with yields shifting in response to uncertain government action worldwide.
An Active ETF Approach to a Core Bond Allocation
Active strategies can help adapt to those circumstances, leaning on managers’ experience. Perhaps most important, however, is the difference between passive and active funds in approaching bonds in the first place.
Passive funds struggle to truly replicate bond indexes, due to a few important factors. Bonds get called in an often unpredictable manner, throwing off the average maturity of the portfolio. What’s more, passive funds also struggle to roll bonds in the same way active funds can. Perhaps not as fundamental, but still beneficial, active bond funds can scrutinize firms’ credit quality levels more closely than passive, index-tracking funds can.
What kind of ETF can benefit from that discrepancy when refreshing a core bond allocation, then? The actively managed ALPS/SMITH Core Plus Bond ETF (SMTH ) could provide a strong candidate. SMTH looks for a high level of current income, taking a bottom-up approach. The ETF invests in global debt securities of any maturity, including government notes, corporate bonds, convertibles, mortgage-backed securities, and more. Its advisers assess factors like yield, liquidity, call risk, and more. Charging a 59 basis point fee, it could provide a new, more adaptable way to run a core bond allocation.
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