Are rate cuts still happening this year? It’s starting to look very uncertain whether the Fed will cut. Chair Jerome Powell qualified previous rate cut talk in recent press statements following recent hot inflation data. Markets entered 2024 hoping for several cuts after initial drops in inflation, but cuts at the same pace as 2022 and 2023’s hikes look increasingly unlikely. That changing outlook speaks to active ETFs’ advantages.
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Why might active ETFs stand out in a zero-rate cut scenario? They can adapt far more quickly than their passive counterparts, and active managers lend their expertise and experience, which can often be prodigious, to their strategies.
That can help, given how much rate cuts can impact the economy. Should rate cuts not materialize, the disappointment may damage economic outlooks already baked in by many investors. On the other hand, should rates drop, certain market segments may benefit more than others. An active strategy that deeply examines each firm’s fundamentals could potentially identify the strongest candidates.
Of course, the merits of active ETFs apply to more than just the strategies they contain. ETFs themselves provide strong tax advantages, with active flexibility, perhaps empowering managers to avoid certain losses.
What kind of active ETF merits consideration for this zero-rate cut scenario, then? The Natixis Vaughan Nelson Select ETF (VNSE), charging 80 basis points (bps), may stand out. The strategy looks for stocks believed to be underrated. Based on a discount cash flow model, the managers make a concentrated portfolio of 20-40 firms selling at a relatively low value.
A discounted cash flow model uses a discount rate to help find the current value of future cash flows. In applying that, an ETF like VNSE may appeal. It has returned 9.6% over the last three years amid rate hike turmoil, and the active ETF is appealing now as the conversation turns towards the timing of the next rate cut.
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