Why Active Investing Can Get More Out of a Fed Rate Cut

The Federal Reserve has cut interest rates once more, bringing the fed funds rate down by another 25 basis points. While markets may have already priced in the move, that Fed rate cut can still provide a boost to investors’ portfolios and market outlooks. The real task, then, becomes finding the right option to approach such a cut. Active investing could stand out as a place to look for options.

See more: Stocks Aren’t Too Expensive – You Just Need the Right ETF

The Fed’s rate cut doesn’t just make borrowing cheaper or alter the yield curve. It has numerous first- and second-order impacts on the economy, shifting outlooks for equities as well as fixed income subcategories. Active investing can help investors navigate those impacts by leaning on fundamental research capabilities. 

In equities, for example, a Fed rate cut may benefit small-cap tech and biotech firms. Those companies must often borrow heavily in anticipation of high future revenues. Cheaper borrowing costs can help those equities, but the question then becomes how to find the right options therein. An active investing strategy can find those companies with greater efficiency than less adaptable, less fundamental research-focused passive funds can.

Meanwhile, in fixed income, active investing can potentially stand out even more. Even absent a Fed rate cut, active has a built-in advantage over passive when it comes to helping investors maintain an allocation to certain bonds. 

Passive funds may struggle to balance, for example, a 50/50 high yield and investment-grade corporate bond allocation, because such funds may struggle to adapt quickly if bonds are called early or face default. Active funds can. 

Not only that, but specifically for rate cuts, active can help. Active managers can lean on fundamental research to identify the appropriate, standout bonds as the yield curve shifts. As with equities, active investing can help find issuers able to do well, meeting various fundamental research criteria.

Active ETFs can help investors get active investing tools in their portfolio with tax-efficient, transparent vehicles. Funds like the T. Rowe Price Capital Appreciation Equity ETF (TCAF) and the T. Rowe Price QM U.S. Bond ETF (TAGG) offer active solutions that may intrigue for those looking. With the Fed rate cut comes opportunity — active investing can help.

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