Now may be the ideal time to prepare client portfolios for rate cuts.
The Federal Reserve has confirmed it is closer to its first rate cut. In response to surging inflation, the Fed instituted one of the fastest, most aggressive rate hiking cycles in decades.
The Fed on Wednesday kept interest rates on hold, while making modest, dovish changes to its policy statement, setting the stage for a potential rate cut in September, according to PIMCO..
Additionally, the latest employment report showed 114,000 jobs were added in July, missing expectations. The unemployment rate rose to 4.3%, its highest level since October 2021, when the economy was still recovering from the pandemic.
The employment data sparked a broad-based selloff, sending markets into a tailspin Friday. Stocks fell sharply in response to the latest data, reflecting renewed fears of a recession.
See more: Employment Report: 114K Jobs Added in July, Less Than Expected
To be clear, progress on inflation has continued and broadened, and labor markets appear to be back in balance. These developments will likely lead the Fed to cut rates several times, according to PIMCO.
As a baseline, PIMCO thinks Fed officials are planning to initiate rate cuts at a once-per-quarter pace, starting in September, and continuing until policy is closer to neutral.
How to Prepare Portfolios for Rate Cuts
Advisors can look ahead and begin preparing client portfolios for rate cuts. Active ETFs could serve as a solution for navigating the uncertain economic environment, as active fund managers are uniquely able to respond to changing market conditions.
In particular, active bond ETFs can do well in both a rising and a falling rate environment, partly due to the uncertainty.
“As the Fed shifts policy and positions for rate cuts, actively managed bond ETFs can be a great choice. Advisors can benefit from the professional expertise in finding attractively valued bonds,” Todd Rosenbluth, head of research at VettaFi, said.
Four active bond ETFs to consider include the PIMCO Active Bond Exchange-Traded Fund (BOND ), the PIMCO Multi-Sector Bond Active ETF (PYLD ), the Fidelity Total Bond ETF (FBND ), and the VictoryShares Core Intermediate Bond ETF (UITB ).
See more: VIDEO: ETF of the Week: PIMCO Active Bond ETF
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