As of June 11, the Bloomberg U.S. Aggregate Bond Index is lower by 2.40% YTD. Much of that downside is attributable to the fact the Federal Reserve hasn’t lowered interest rates. The agency appears unlikely to do so more than once — if at all — this year. Yet some corners of the bond market are outperforming “the Agg” in a noteworthy fashion. That could signal to fixed income investors that the case for bonds is alive and well.
It’s merely a matter of considering some unique approaches to the space. Enter the ALPS/SMITH Core Plus Bond ETF (SMTH ). In quiet fashion, the actively managed SMTH has been an undisputed success since coming to market last December. Over that period, has SMTH amassed nearly $750.7 million in assets under management. But more importantly, it’s topped the Agg — the index the ETF attempts to beat.
SMTH Could Be Ready to Shine Some More
Obviously, past performance isn’t a promise of future returns, and SMTH’s real time track record is short. Still, those shouldn’t be considered detriments when evaluating the ETF. With some market observers wagering the second half of 2024 could bring better things for broader fixed income strategies, it’s possible SMTH extends its leadership.
“Looking into the second half of the year, we are optimistic that returns will be stronger, but also expect volatility to remain elevated. Finding the right mix of fixed income asset classes will be the key to performance,” noted Kathy Jones of Charles Schwab. “Treasuries remain a core holding, but with the yield curve inverted, the potential for gains from price appreciation appears limited. Even with the shift in expectations, the market is still discounting rate cuts over the next few years.”
Specific to SMTH’s status as an actively managed ETF, that could be advantageous, because should the Fed continue disappointing regarding rate cuts, that could spark increased volatility in the bond market. Active managers can more swiftly mitigate increased turbulence than passive indexes. It’s not a foregone conclusion that bond volatility will spike, but SMTH represents a credible avenue of preparation for investors who don’t want to be left scrambling.
“Based on the likelihood of slower growth, easing inflation, and Fed rate cuts, we see room for longer-term yields to decline. However, the path to lower rates is likely to remain slow and bumpy. An important consideration is why the Fed would cut interest rates. If rate cuts are a response to declining inflation, then 10-year yields would likely drop to around 4% in the second half of the year,” observed Jones.
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