Avoid a Fed Fight With Active ETFs

The VettaFi Q3 Fixed Income Symposium came just less than 24 hours after the Federal Reserve instituted its first rate cut of the year. While this was widely expected by the capital markets, investors may not be well-positioned to maximize their fixed income exposure. It’s an ideal opportunity to take advantage of active management.

Thornburg Head of Fixed Income and Managing Director Christian Hoffmann joined TMX VettaFi Head of Research Todd Rosenbluth to discuss the recent rate cut and how active ETFs can fill the income void that could result due to lower rates.

“Don’t Fight the Fed”

Often times during major announcements, the market reaction and the actual market move can be diametrically opposed. This is exactly what happened in the bond market.

“The bond market initially reacted very favorably to what they saw as a more dovish policy, but that actually started to reverse even before the press conference,” Hoffman said, adding that the prospect of two more rate cuts is “a little stronger than the market anticipated” and “the first move is often the wrong move.”

Also, market movements were not as impactful. Rate cuts may have already been baked into prices prior to the Fed announcement.

“A lot of the goodness was already priced in,” Hoffman confirmed.

Rate cuts will continue to take center stage as a primary driver for bond markets. However, the Fed itself could see changes with a member shakeup. Discussions on the Fed potentially losing its autonomy under presidential pressure have been circulating in financial news as of late. That has investors wondering how to best position their portfolios.

“I agree with the audience poll that that you still want to be overweight duration,” Hoffman said. He explained that this speaks to the notion that the bond market is at an inflection point. “There is the pure data-driven inflection point” in economic data, he said. Additionally, there’s the “changing of the composition of the Fed and a clear desire to shake up the members with a more dovish posture.”

All in all, it brings up an old adage: “Don’t fight the Fed.” That statement rings true today. If a Fed member shakeup is ahead, then as Hoffman said, “We need to start modeling for a pro forma Fed.” If the Fed is pushing for lower rates and a normalizing yield curve, they’ll do what’s necessary to make it happen.

“You need to position your portfolio with that in mind,” Hoffman added, mentioning the concept of “yield curve control.”

This brings to mind a pair of funds. Both are ideal for strategic positioning in an environment where Fed uncertainty adds another layer of complexity.

2 Active Opportunities

Thornburg has an active ETF roster with two that can address specific needs for fixed income investors or to use as an entire bond portfolio. In the case of getting core exposure, consider using the Thornburg Core Plus Bond ETF (TPLS) as an ideal solution with an active strategy that makes it more flexible in various market conditions, as opposed to passive funds tethered to an index.

As previously mentioned, rate cuts can affect fixed income investors who rely solely on one specific debt issue like Treasuries. This is where an income diversification ETF like the Thornburg Multi Sector Bond ETF (TMB) can assist. Its income diversification and active management allows the fund to thrive in any market environment. That makes it an all-weather fixed income solution that can extract more income compared to a core fund. Or as Hoffman said, it can get “high-yield like returns, but with a much higher quality portfolio and less volatility.”

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