The Fed instituted the first rate cut of the year and there are potentially more to come before 2025 turns into 2026. This puts fixed income investors on alert to ensure they properly position their portfolio for this shifting interest rate environment. This can cause a degree of market anxiety. But active bond ETFs can help with the changing bond market dynamic.
As short-term rates fall, this is beginning to manifest in a steeper yield curve. Fixed income investors who have been accustomed to the high yield environment of today will want to re-strategize their portfolios to account for both short-term and potential long-term changes.
“Cash and shorter-dated securities are subject to reinvestment risk—if yields fall, proceeds from those assets may not be able to be invested again at their original rate,” Morningstar noted. “On the other hand, longer-dated bonds could be subject to volatility, thanks to fluid fiscal and trade policy, an uncertain economic outlook, elevated inflation, and political pressure on the Fed.”
The Active Advantage
Rather than choosing individual bond issues, ETFs have been able to provide diversified exposure in the convenience of a cost-effective, transparent, and tax-efficient investment vehicle. Active ETFs also add a distinct advantage: flexibility in uncertain markets.
For the rest of 2025 and beyond, investors will want to avoid having to track the Fed’s every move. In a recent webinar, Thornburg’s Head of Fixed Income and Managing Director Christian Hoffmann joined TMX VettaFi’s Head of Research Todd Rosenbluth to discuss how active ETFs can adjust to the new macro environment of lower rates.
Furthermore, bond markets can be complex and nuanced. Portfolio managers who are privy to the bond market can adjust the holdings of an ETF to attain their market objectives. This helps to capture upside in a certain corner of the bond market or mitigate downside risk. If the fund is yield-focused, it can allow portfolio managers to seek opportunities to maximize income.
This higher degree of flexibility is not inherent in passive funds tethered to an index. Often times, these indexes make their allocations based on market value weight. That means only having exposure to the largest issuers. Again, active management puts allocations in the hands of portfolio managers who can adjust holdings as market conditions change.
2 Active Options
When considering active fixed income exposure, Thornburg has two options to consider. For core exposure, the Thornburg Core Plus Bond ETF (TPLS ) is an ideal solution for added flexibility in various market conditions compared to passive funds tethered to an index.
As mentioned, rate cuts can affect fixed income portfolios that leverage one specific debt issue such as Treasuries. An active ETF that diversified income like the Thornburg Multi Sector Bond ETF (TMB ) can assist. Its income diversification and active management makes it an all-weather fixed income solution to extract more income in a rate-cutting environment.
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