Indexed ETFs can provide an easy, cost-effective alternative for fixed income exposure that draws from myriad sources. However, investors could be missing out on the advantages associated with active management. Given the current macro environment, it’s almost a necessity.
An episode of Morningstar’s “The Long View” discussed how fixed income has evolved in a short time frame. Much of that could be traced back to 2022. That’s when equities and bonds were both heading in a downward trajectory. The Federal Reserve was aggressively raising interest rates to combat inflation.
Fast-forward to now. Inflation has been subsiding in a new rate-cutting regime. But investors looking to jump back into bonds might opt for a simple solution via an indexed fund. However, they should consider using active management. That’s especially the case if they’re considering fixed income strategies that extend beyond bonds such as structure products. Collateralized loan obligations (CLOs) are an example.
“There are a lot of things that are going to be left out if you just buy your plain-vanilla core market exposure, that you’re not going to get exposure to in the bond market,” said Eric Jacobson, Morningstar’s senior principal for fixed-income strategies. “A lot of people may have heard of CLOs; they’re collateralized loan obligations. I’d have to go down a long list on the mortgage side of things that have become more and more popular with active managers but just don’t really exist in the big indexes. And even in sort of nichey things, it’s very hard to get index exposure to them.”
Active management allows portfolio managers to identify income opportunities. It also allows them to respond to changing market conditions. This autonomy makes active ETFs all-weather solutions in any economic landscape.
