The rise of active ETFs has slowly but surely changed the investing landscape. Investors can get access to flexible strategies that can adapt to circumstances and often outperform passive peers. Perhaps the greatest opportunity in the rise of active investing may be how active investing can help bond funds deliver their proposed exposures better than passive funds can. As interest rates are shifting, then, now may be the time to move some core bond allocations into active ETF wrappers.
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Why might active ETFs be primed to outdo their passive peers, specifically? Passive ETFs offer investors exposures close to the index they track. For example, a passive bond ETF tracking a corporate bond index may combine 70% investment grade bonds and 30% high yield or “junk” bonds. Due to bonds sometimes being called early, for example, or being defaulted upon, slow moving passive bond funds often struggle to properly replicate their holdings.
That’s where an active bond ETF can step in and help. The active core bond ETF SMTH, for example, can help. The ALPS Smith Core Plus Bond ETF (SMTH ) charges a 59 basis point (bps) fee for its approach. The strategy actively invests in global debt securities of any maturity and quality.
Specifically, its bottom-up approach looks for a high level of current income via a wide range of assets. That includes assets from corporates to government notes to mortgage-backed securities. The fund can also actively invest in commercial loans, money market instruments, and other yield-boosting opportunities. SMTH’s advisers consider factors like yield, credit ratings, liquidity, and more in deciding between debt options.
Together, that has helped the active core bond ETF return 5.7% YTD according to ETF Database data. That has outperformed both its ETF Database Category and Factset Segment averages, 5.2% and 4.2% respectively. What’s more, the fund’s approach has helped it outperform the iShares Core U.S. Aggregate Bond ETF (AGG) over the last five years per YCharts data.
Overall, the fund can provide a strong option to get more active into a fixed income allocation. For those wanting a fund with managers attentive to interest rates and other potential shifts in markets, SMTH can appeal.
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