As 2026 dawns, the world of bond investing is facing a crossroads. On December 31, 2025, Stephanie Stanton hosted a season 5 episode of First Look ETF, bringing together some of the brightest minds in the exchange-traded fund (ETF) industry to dissect the latest marketplace trends. The episode, sponsored by the New York Stock Exchange (NYSE), featured Maital Legum from NYSE, Chris Wilson—Head of Product & Strategy for Voya Investment Management, Sriram Reddy—Head of Client Portfolio Management, Discretionary at Man Group, and Wayne Plewniak—Managing Director and Head of Gabelli Fixed Income. Their conversation zeroed in on high-conviction income strategies, particularly those leveraging unique active management approaches.
But why is active management suddenly at the forefront? According to Morningstar’s much-anticipated 2026 market outlook, investors who’ve long relied on passive bond index funds might be in for a bumpy ride. The report paints a picture of an uncertain interest rate environment, with the Federal Reserve’s rate-cutting path still highly dependent on incoming economic data and inflationary pressures that stubbornly refuse to fade. In this climate, bond allocators are urged to seek out strategies that can pivot and adapt, rather than remain chained to a single, inflexible bet.
“In today’s market, the challenge isn’t simply finding income, it’s trying to make sure that it endures,” the Morningstar report stated. That sentiment was echoed in the First Look ETF discussion, where the panelists explored how active management can help investors weather multiple rate scenarios in the coming months.
One fund that’s drawing significant attention is the ALPS Smith Core Plus Bond ETF (SMTH). According to ETF Database, SMTH employs a distinctly active approach, zeroing in on intermediate-duration bonds—those maturing in five to ten years. Morningstar’s 2026 outlook calls this segment the “sweet spot” for risk and reward. Why? These bonds offer yields that are competitive with cash, but they also carry the potential for capital appreciation if interest rates decline. SMTH currently holds nearly half its portfolio in this intermediate range, while the rest is split between longer-duration bonds—aiming for higher yields—and shorter-term securities that provide a defensive cushion.
This flexibility is what sets SMTH apart from its passive peers. While aggregate bond index funds are bound to mirror their benchmarks regardless of market conditions, SMTH’s managers can actively shift allocations between Treasuries and corporate bonds, responding in real time to changes in credit risk and market sentiment. As the Morningstar report points out, “Active managers can adjust corporate bond exposure based on current valuations, while passive funds must track their indexes regardless of pricing.”
Investors appear to be taking the hint. SMTH has attracted a whopping $966 million in net inflows so far this year, with $81 million pouring in just over the past month, according to ETF Database. That brings the fund’s assets under management to $2.4 billion as of December 31, 2025. The performance numbers are equally impressive: SMTH returned 7.10% year-to-date, a testament to the advantages of being nimble in a shifting landscape.
What’s driving this migration toward active bond strategies? One key factor is the state of corporate credit spreads. Morningstar’s data reveals that U.S. investment-grade bond spreads are hovering just above 70 basis points over Treasuries—near historical lows and a far cry from the long-term average of 132 basis points. In layman’s terms, that means corporate bonds are offering less extra yield over ultra-safe government debt than usual, making them less attractive for income-seeking investors. The report bluntly notes, “Credit spreads are tight, making corporate bonds less compelling.”
For passive funds, this presents a dilemma: they must continue to hold corporate bonds in the proportions dictated by their indexes, even when the risk-reward equation is less favorable. Active managers, on the other hand, have the latitude to dial back corporate exposure when spreads are this skinny, reallocating to Treasuries or other sectors as conditions warrant. It’s a level of agility that many see as essential in today’s uncertain environment.
During the First Look ETF roundtable, the guests delved into two high-conviction income strategies that underscore the value of active management. While the specifics of each approach varied, the common thread was a focus on adaptability—building portfolios that can handle whatever the Federal Reserve, inflation, or the broader economy might throw at them in 2026.
Chris Wilson of Voya IM highlighted the importance of not being “locked into a single bet,” echoing Morningstar’s conclusion that bond investors need to be prepared for multiple scenarios. Sriram Reddy of Man Group and Wayne Plewniak of Gabelli Fixed Income each emphasized how active strategies allow managers to respond to rapidly changing market dynamics, positioning portfolios to both defend against downside risks and seize opportunities when they arise. Maital Legum from NYSE provided insights into how the exchange is seeing increased demand for innovative ETFs that offer more than just passive exposure.
Of course, not all investors are ready to abandon passive strategies entirely. Many still appreciate the low costs and transparency that index-tracking funds provide. But the consensus among experts is that the days of “set it and forget it” may be numbered—at least for those seeking stable income in the face of volatility.
So, what’s an income-focused investor to do? The answer, it seems, is to blend the best of both worlds: use active management to adapt to market shifts, while maintaining a disciplined approach to risk and reward. As the Morningstar report concludes, “For bond investors, that means building portfolios that can handle multiple rate scenarios in the months ahead.”
With 2026 shaping up to be anything but predictable, the ETF landscape is evolving fast. Funds like SMTH—and the managers behind them—are proving that adaptability isn’t just a buzzword; it’s a necessity. As the year unfolds, all eyes will be on how these active strategies perform when tested by the real-world twists and turns of the global economy.
In the end, the message from both the First Look ETF panel and Morningstar’s outlook is clear: flexibility, vigilance, and a willingness to rethink old habits will be the keys to enduring income in the new year.
