Tariff volatility is 'good' for actively managed ETFs. Here's why.

00:00 Speaker A

For more on how investors should be positioning with that renewed uncertainty, let’s bring in Scott Dennis, TCW managing director and head of ETFs for this week’s ETF report brought to you by Invesco QQQ. Scott, thanks for being here.

00:09 Scott Dennis

Thanks for having me.

00:10 Speaker A

So, you know, obviously stocks are higher now after the president’s comments. They were low yesterday. But we’ve definitely seen over the past year sort of geopolitical statements, the president talking. We’ve seen since the beginning of this year also markets react and then we kind of see things kind of bounce around. How should people be thinking about that from an ETF perspective?

00:36 Scott Dennis

Yeah, I think um, well first of all from an industry perspective, um 2025 was a a tremendous year. Um ETFs in general grew by 33%, up to 3 and 1/2 trillion dollars. Um to get to your point, what’s interesting to me about last year was the growth of active ETFs. And I think that’s very much uh a um is happening because the market is so volatile. There’s a lot of volatility, a lot of uncertainty. So investors are seeking and and looking for ways to um invest in an active way. Um and they seem to be doing that. Well, I know they’re doing that in the active ETFs and for example, active ETFs last year grew by 63% in assets versus passive. So there’s clearly, at least our opinion at TCW is sort of this secular shift that we’re seeing in a move from sort of passive ETF implementation to an active active ETF implementation. And ETFs in general give you intraday liquidity, so the ability to to transact when the markets move, when there’s a headline or when there’s other volatility in the marketplace.

01:34 Speaker A

And was some of that money or I guess it was a high proportion of that money going into ETFs that sought to dampen that volatility if it was occurring or what were we seeing on that front?

01:50 Scott Dennis

Um I think there definitely was that. I mean years years ago when we’ve seen a lot of interest in minimum volatility type of ETFs. At TCW, we are much more um active, meaning that we are taking, we are high conviction um concentrated portfolios where we’re taking a look at fundamentals and relative value to implement strategies where we’re generating alpha. So we’re moving quickly. We’re taking a look at what the market is giving um to us and then reacting in in scenarios like that. Um you know, liberation day for example was a we don’t love volatility but volatility is good for active management. Um so we took advantage of that in in um in terms of um buying relative value and liberation. And yesterday another example, we obviously had a sell off across rates, currencies and equities and those present opportunities for active managers to generate more alpha.

02:40 Speaker A

So did you see yesterday then, just to said a little more explicitly. Yesterday was a buying opportunity in equities, do you think?

02:45 Scott Dennis

Um, I think it was a buying opportunity. Again, TCW being an active fundamental driven. If there is a sell off and there provides relative value um in equities, we’ll certainly do that. If it we’re, you know, our equity active ETF franchise is primarily thematically based. Um so if there’s opportunities in energy or opportunities in AI, we will take advantage of that. On the fixed income side, we obviously saw a lot of um some movement, um some rise in in JGBs overnight. I do think on the on the active fixed income franchise side of side of the house, um we certainly would take advantage of potentially in particularly in the long end of the curve, you know, a sell off in in JGBs.

03:22 Speaker A

Um the Japanese government bonds for those who don’t not the Jerry Garcia band, which is always where my brain goes. Um so when you look at what’s going to happen this year in terms of the growth, the continued growth in active ETFs, yeah. Do you think it’s going to be more in the fixed income side, more in the equity side? What do you think is going to be now the next sort of phase of what’s driving that?

03:45 Scott Dennis

Yeah, I mean last year the growth was um both in fixed income and in equities. There certainly was more growth on the equity side of the active um ETF space. Um I think going forward in 2026, I I think we’re going to see the same thing. I think there’s still going to be this steady growth. I actually think we’re going to have an acceleration of growth going forward in 2026. Um, I’m a former bond bond bond trader um salesperson, so you know, on the fixed income side specifically, I think there there’s opportunities particularly in active in a flexible type of environment. Um our one of our um active fixed income ETFs, FLXR, um is is one of as an unconstrained fund where it can kind of rotate into different sectors. It can take advantage of relative value. Um it also can take a look at, you know, certain securities, certain bonds that we feel are undervalued or we have conviction that can can generate alpha. You know, for example, um credit spreads are historically tight. They have been for several years. Um so we’re in Flexor and across our really our ETF franchise, active ETF franchise, we’re underweight credit. We’re making up for that high quality by generating yield in the securitized space. So we feel that’s securitized and you’ll see this playing out in something like FLXR, um we’re able to to generate high quality, high quality income in that product.

05:22 Speaker A

And just quickly then, I’m curious what your outlook for yields is this year in the Treasury market, especially given the past couple of days.

05:29 Scott Dennis

Um you know, from a house perspective, um I definitely think we’re expecting to see um the Fed to cut a couple of times this year. Um I think we think it’s going to be relatively slow and steady and it’s really going to be dependent upon what news and what headlines are coming out there. And we saw a lot going on this morning with with Trump speaking from Davos, so that could certainly have an influence in terms of our policy. Um our portfolios, uh Flexor for example is is position shorter in duration. Um so it’s position both for a potential Fed um reduction in rates or maybe a longer pause in that. So we’ll take advantage if if rates do lower in a Fed cut, but at the same time, same point, we’re still able to generate some additional yield and some carry in that part of the curve.

06:12 Speaker A

Gotcha. Steve, thanks for coming in. Or Scott. Sorry, I’m all over the place with names today. That’s what happens when I listen to a more than an hour long speech. Thanks so much.