Within bond markets, active managers consistently outperform their benchmarks at significantly higher rates than active managers within equity markets. CNBC recently reported that 84% of active bond fund managers outperformed their benchmarks within the year-long period that ended on June 30, 2021; in the same time period, only 47% of active equity fund managers beat their benchmarks.
Active management within the bond space just makes sense, mostly because of the way that bond indexes are structured. The Bloomberg U.S. Aggregate Bond Index is weighted according to the amount of debt an issuer has within the fixed income market; companies with more debt have greater weightings than those with less debt. A company that is paying off debts without issuing new debts would decrease its weight within the index, while a company issuing more debt would increase its weight.
To follow the benchmark within the bond space would be to invest purely in companies by the amount of debt they have without taking into account credit risk or the impact of interest rates. An active manager instead is able to analyze the individual securities, ascertain their credit risk, and decide what levels of exposure they want, given the company’s performance as well as current market conditions and interest rates.
The T. Rowe Price QM U.S. Bond ETF (TAGG) is a fund that utilizes active management within bond markets. The benchmark it seeks to beat is the Bloomberg U.S. Aggregate Bond Index, an index that is broadly diversified and typically contains investment-grade, fixed income instruments that have intermediate- to long-term maturities.
Duration and yield curve positioning can vary, but are kept relatively aligned with the benchmark. As of the end of October, the weighted average duration was 6.63 years and the weighted average maturity was 8.65 years.
The fund will typically include U.S. government and agency obligations, corporate bonds, mortgage- and asset-backed securities, and U.S. dollar-denominated securities from foreign issuers. The advisor generally invests in a way that creates a similar risk profile to the index but will use quantitative modeling (QM) and fundamental research to outperform the index. This means that sometimes the fund can be overweight or underweight compared to the index.
Through active management, the advisor is able to evaluate the credit risks of individual securities and respond to changing market conditions from interest rate changes and market movements.
TAGG carries an annual expense ratio of 0.08%.
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