Finance
Investors should consider Bond ETFs before Fed cuts: BondBloxx COO
Investors may want to stick with fixed income investments — possibly even adding to them — despite the Federal Reserve’s intention to cut interest rates this year.
“Your biggest mistake could be rushing back into equities before you’re considering all these opportunities in fixed income,” BondBloxx co-founder and COO Joanna Gallegos told CNBC’s “ETF Edge” this week.
Though off its peak of more than 5% in late 2023, the benchmark 10-year U.S. Treasury note yield has reaccelerated over the past month. As of Thursday’s market close, the yield was hovering near 4.31%. It touched 4.429% on Wednesday, a high for this year.
To manage interest rate volatility effectively, Gallegos suggests investors look to exchange-traded funds focused on intermediate term bonds.
“If you go into the intermediate space, whether it’s in credit or within Treasurys, you’re taking on some risk and you’re going to benefit from a total return tail wind when rates go down,” she said.
Morgan Stanley Investment Management’s Tony Rochte recommends a similar medium-term strategy with vehicles like the Eaton Vance Total Return Bond ETF (EVTR) under his firm’s management.
“It’s right now a 6-year duration, about a 6.6% yield,” the firm’s global head of ETFs said in the same interview. “It’s a best ideas portfolio.”
Rochte also pointed to municipal bond funds, like the Eaton Vance Short Duration Municipal Income ETF (EVSM), for income-generating opportunities.
“We also converted a municipal bond mutual fund last Monday here at the NYSE to an ETF, symbol EVSM, and that’s a municipal. Again, 3 1/2% yield, almost a 6% taxable equivalent yield. So these are very attractive rates in the current environment.”
It appears T. Rowe Price is benefitting from the record growth in actively managed exchange traded funds.
Tim Coyne, the firm’s head of ETFs, reports the firm is seeing significant growth in the area — listing the T. Rowe Price Capital Appreciation Equity ETF (TCAF) and T. Rowe Price U.S. Equity Research ETF (TSPA) as two established strategies that can satisfy investor demand.
“I think having that professionally managed portfolio is really beneficial to clients,” Coyne told CNBC’s “ETF Edge” this week. “We’re seeing just… greater volatility [and] uncertainty across both the equity and fixed income markets.“
According to Coyne, the T. Rowe Price Capital Appreciation Equity ETF suits investors who are looking for long-term growth.
“The objective of the fund is to outperform the S&P 500 with lower volatility and greater tax efficiency,” he said. “It’s also a more concentrated portfolio, typically holding around a hundred names.”
As of April 24, the fund’s top holdings include Microsoft, Amazon, and Apple according to the T. Rowe Price website. But it’s not all Big Tech. The ETF also features smaller positions in companies like Becton Dickinson and Roper Technologies.
The T. Rowe Price Capital Appreciation Equity ETF is down about 5% so far this year while the S&P 500 is off about 7% However, the ETF is up close to 8% over the past year — roughly identical to the S&P 500’s performance.
Coyne notes the T. Rowe Price U.S. Equity Research ETF follows a similar strategy, but with a heavier weighting in top tech stocks.
“This is more of a large-cap growth product [T Rowe Price U.S. Equity Research ETF],” he said. “There are components of characteristics of both passive and active here. This fund is actually managed by our North American directors of research. So again, strong fundamental research is going into the stock selection.”
Both the T. Rowe Price U.S. Equity Research ETF and S&P 500 are down around 7% since the beginning of the year. Meanwhile, the fund is up almost 9% over the past year. That’s less than one percent better than the S&P 500’s performance.
T. Rowe Price U.S. Equity Research ETF vs. S&P 500
‘Some form of bear market’
Strategas Securities’ Todd Sohn thinks investment demand for active managers will continue to be strong.
“This is the type of the environment where it [active management] can actually shine,” the firm’s senior ETF and technical strategist said. “We are in some form of bear market. This is where the active manager really can come into hand and offer their solution they are doing right.”
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