Rate Cut Adds Emphasis on Active ETFs

The capital markets weren’t blindsided by the U.S. Federal Reserve’s third and final rate cut of 2025. While the majority of markets are cheering the quarter-point cut, a contingent of fixed-income investors could jeer at the prospect of yields falling with more cuts to come in 2026. This is where an actively managed strategy encapsulated in an ETF can assist.

Early prognostications of another 25-basis-point cut in the opening month of the new year already show an over 70% chance, per the CME Group’s FedWatch indicator. In true Fed fashion, a cut will be predicated on how they assess the influx of economic data from now until the new year.

“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the Fed statement said following the cut. News outlets reported that the Fed will make only one cut in the new year, but many remain skeptical.

What hasn’t been standard fare is the recent dissent among Fed members. According to a CNBC report, three members opposed the cut, with nine in favor. Two wanted to keep things steady, while another wanted a steeper cut.

Investors worried about further cuts eating into the yields on their current fixed-income investments may want to consider active management.

Flexibility and Income During Cuts

Irrespective of what the Fed is doing, an actively managed strategy can flex with rate decisions. The autonomy given to active portfolio managers allows them to adjust the fund’s holdings. This comes regardless of what the Fed or other systemic factors affecting bonds do.

That said, a fund that should get prime consideration is the Vanguard Core-Plus Bond ETF (VPLS). It’s an ideal option for fixed income investors looking for a core bond solution that tilts toward generating additional income, a boon in this rate-cutting cycle.

Backed by the expertise and experience of the Vanguard Fixed Income Group, the fund’s active management enables its portfolio managers not only to identify income opportunities but also to respond to changing market conditions. When it comes to exposure, VPLS primarily skews towards U.S. Treasuries but also adds exposure to mortgage-backed securities, corporate securities, and emerging markets debt of varying yields, maturities, and credit qualities to reach for more yield.

Active funds often carry a stigma as being too expensive. That’s not the case with VPLS, which boasts a low expense ratio of just 0.20%. It’s a low-cost, active fund that’s ideally suited to serve as an investor’s core bond exposure while providing added yield.

For more news, information, and strategy, visit the Fixed Income Content Hub.