What’s the right move when looking around the world of fixed income ETFs? The ETF wrapper has provided some major advantages to investors since it arrived, and even more so when the “ETF Rule” allowed the space to truly bloom and the vehicle to really shine. That said, not all exchange-traded funds are created equal for fixed income. Active strategies present some notable advantages over their passive peers.
See more: Record ETF Launch Pace Driven by Active ETF Popularity
Why look to active versus passive ETFs in fixed income ETFs? To analysts at T. Rowe Price, replicating a bond index as a means to invest in fixed income poses challenges. Whereas passive strategies can replicate equity indexes, it’s “impossible,” the analysts say, to replicate a massive index like the U.S. Agg. That’s due to bonds being issued in smaller quantities and how they trade infrequently, with shifting maturities, credit ratings, and early redemptions all posing added challenges.
Passive vs. Active Fixed Income ETFs
While passive approaches, then, face issues, active investing may provide a better route into fixed income ETFs. Active management provides flexibility to adapt to shifting situations for bonds while also adapting to a shifting rate environment. Given how much the outlook on interest rates has vacillated in the last 12 months, that approach could help in a macro sense and in terms of structurally approaching bonds themselves.
An ETF like the T. Rowe Price QM U.S. Bond ETF (TAGG) could provide an option for those looking for active fixed income ETFs. TAGG charges eight basis points for its approach. Set to hit its three-year ETF milestone in September, it looks to outperform the Agg via investing in a wide range of investment-grade U.S. bonds with broad maturities.
Fixed income ETFs provide a wide range of growing opportunities. Not all such ETFs are created equal, however. Active fixed income strategies could provide a helpful alternative, as part of a growing push by active among ETFs.
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