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Actively managed bond exchange-traded funds boast the same benefits over actively managed bond mutual funds that their stock-picking counterparts do. In most cases, assuming all else equal, their lower fees and the prospect for greater tax efficiency make consuming these actively managed bond portfolios in an ETF wrapper more desirable. But, at the risk of stating the obvious, bonds are not stocks. And the differences between them mean that bond ETFs often aren’t as tax-efficient as stock ETFs. Also, some actively managed bond ETFs may experience growing pains. They might not be able to faithfully replicate the portfolio of their mutual fund predecessors from day one, and they might not be more tax-efficient at least not at first. Here, I will review these considerations in more detail through the lens of three Morningstar Medalist fixed-income funds that are available in both a mutual fund and an ETF wrapper.
In the early throes of the recent global pandemic, the Federal Reserve lowered interest rates twice, resulting in a 0-0.25% federal-funds rate that hasn’t budged. But with coronavirus vaccinations in progress and the U.S. economy showing signs of recovery, many expect interest rates to rise, though few agree on when this will happen. Rising rates have a negative impact on strategies with long duration (a measure of interest-rate risk), and recent rising-rate anticipation has led many investors to take a closer look at the durations of their funds. But duration alone won’t make or break performance for thoughtfully curated allocation strategies. Other characteristics of the portfolio’s profile, such as the size of the equity sleeve relative to that of the bond sleeve, geographic and sector diversification, and tilts to lower credit risk, can offset the effects of a longer duration relative to peers. Let’s consider a few Morningstar Medalist allocation strategies during two rec
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At first blush, investors might think that an actively managed exchange-traded fund is an oxymoron. They can be forgiven for this mistake. After all, for their first 15 years of existence, ETFs were the exclusive domain of indexers. Even today, active ETFs account for just 3.5% of the $6.6 trillion that investors have allocated to ETFs.
Active ETFs are not a contradiction, but an innovation. ETFs are just a vessel, a wrapper in which asset managers package and distribute investment strategies to investors active, passive, and everything in between. The ETF wrapper can deliver material benefits for investors partnering with active managers. But, as with everything, there are trade-offs. Not every strategy is a good fit for an ETF. Also, depending on the strategy, ETFs benefits might not always materialize.
The following is our latest Fund Analyst Report for Oakmark Select (OAKLX)
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True to form, Oakmark Select has rebounded. It receives a Morningstar Analyst Rating of Silver.
The strategy is recovering from a multiyear slump. A rough patch during early 2020 s pandemic-induced sell-off was disappointing but not uncharacteristic. The portfolio s value tilt relative to its S&P 500 benchmark and former large-blend Morningstar Category peers proved disadvantageous in the narrow growth-led market of recent years. But an inability to get the team s most successful stock picks into this focused portfolio particularly stung versus its more-diversified sibling Oakmark (OAKMX).