How active management protects against bears


Bank of America lowered its target for the S&P 500 this year by 900 points, to 3,600, predicting a “mild” U.S. recession from the second half of 2022 and expecting the Federal Reserve to “pivot” in 2023. In a research report released Thursday, equity and quantitative strategists at Bank of America called the new year-end target “the lowest on the street.”

And BofA is not alone in its revised – and pessimistic – assessment. As MarketWatch reported, Citigroup and Credit Suisse also recently lowered their estimates for the S&P 500 after the market took a hit in the first half of 2022.

The S&P 500 has fallen 20.5% this year. The index fell for a fifth consecutive day on Thursday, according to Dow Jones Market Data, its longest losing streak since June 14. Adding to the grim economic news, the Department of Labor reported earlier this week that inflation rose 9.1% in the 12 months to June, the fastest pace since November 1981. This exacerbated investor fears that the Fed continues its hawkish trajectory of aggressive rate hikes, which many analysts believe could lead to a recession.

BofA strategists expect the Fed to pause in the first half of 2023 and start cutting rates in the second half of 2023. “The Fed is expected to rise to 3.25%-3.5% by the end of the year,” the strategists wrote.

Such an environment can give active equity managers a chance to shine. With inflation at its highest level in four decades and rising interest rates, markets are expected to remain volatile. In such a volatile market, passive ETFs may not offer downside protection. Nor do they offer investors a way to seek above-average returns.

Active equity ETFs have outperformed their passive peers, with more than half of U.S. equity funds outperforming the average passive portfolio year-to-date through May 30, according to Barron’s. This figure is up from 45% in 2021.

And active funds also mitigated losses during the bear market. The average annual return through May for large-cap active value funds was -4%, compared to -7.3% for comparable passive funds. Small-cap active core funds returned -10.9%, compared to -13.1% for passive peers.

“We are seeing growing demand for active ETFs as advisors build ETFs portfolios that hold more than just index products with the aim of outperforming the broader market in a risk-conscious approach,” said Todd Rosenbluth, head of research at VettaFi.

T. Rowe Price offers a suite of actively managed ETFs. T. Rowe Price has been in the investment industry for over 80 years conducting hands-on research with companies, utilizing risk management and employing a multitude of experienced portfolio managers averaging 22 years of experience .

For more news, insights and strategy, visit our Active ETFs Channel.

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