Not sure about your bond allocation? Consider active ETFs

Fixed income may be making a comeback with the return of a real interest rate market in recent years, but what is the best way for investors to approach this sector? Fixed-income allocations, intended to follow a different path from stocks, offer more complications than stocks in many ways. Navigating these particularities may require investment and active management. Active ETFs can help securitize temperamental debt offerings while navigating rate movements.

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It may be helpful to first think about how passive ETFs approach bonds. Developing a debt securities index may seem like a simple option at first glance, but appearances can be deceiving. Consider how often bond indexes weight their holdings by outstanding debt. This can mask other important factors, unlike market cap weightings. Total debt does not fully reflect credit risk.

The bond world contains many inefficiencies, both on the client and issuer sides. For clients, an overreliance on risk can lead to choosing too many bonds or less productive options. On the issuer side, as with debt weighting, the lack of easily comparable issuer information can make passive portfolio construction difficult.

Active management tends to succeed in inefficient market segments like fixed income. Active ETFs can bring transparency and tradability to this inefficient space. Additionally, the active management aspect can offer in-depth research capabilities. Seasoned managers, with years of experience in the field, can offer deeper scrutiny than passive ETFs.

T. Rowe Price offers a variety of active ETFs focused on fixed income. THE T. Rowe Price Total Return ETFs (TOTR VS), for example, charges 31 basis points for its approach. It seeks to provide diversified exposure to US fixed income securities while maximizing total return. For investors interested in fixed income, active ETFs can be a powerful set of tools worth considering.