By Paul R. La Monica
With big tech stocks taking a hit to start off 2026, investors are learning that having too much exposure to passively managed index funds that all have a big chunk of their portfolios in the Magnificent Seven may not be the best idea. There is a place for active management, even in the low-cost world of exchange-traded funds.
Drew Pettit, U.S. equity and ETF strategist at Citigroup, thinks the boom in active ETFs is only just beginning.
"Underlying the impressive industry growth story is the surge in active ETFs. We expect this tailwind to persist," he said in a report. "Our base case expects active's market share of ETF [assets under management] to double in ten years as these products gain greater share of industry flows."
According to data from LPL Financial, the total value of ETFs was $13.3 trillion as of March. Pettit and his team said that Citi's base case is for ETF assets under management to surge to $25 trillion by 2030 and $42 trillion in 2035. He added that Citi believes active ETFs share of the total ETF market will more than double from 10% currently to 21%.
Pettit and his team identified particular opportunities in more esoteric niche strategy ETFs, core bond and equity portfolios and specialized themes such as dividend investing. With that in mind, here are three ETFs that fill those buckets that Morningstar recommends as top picks for 2026.
T. Rowe Price Floating Rate ETF
This fund invests primarily in leveraged bank loans that are just below the cusp of being rated investment grade. So yields are higher but investors aren't taking as much risk as they would with debt that would be considered deep junk.
The T. Rowe Price Floating Rate ETF, which yields nearly 7%, has posted a slightly positive return this year in a rocky environment. And it has averaged annualized gains of 8% over the past year and three years, ahead of its category.
There is exposure to loans from software companies, which could be viewed as a concern given the worries about the private credit exposure to the industry as investors fret about the impact of AI on software earnings and valuations. Still, tech loans make up less than 15% of the portfolio. And the fund has between 200 and 300 positions at any given time, which further helps to minimize the risk of any problems tied to a specific issuer or sector.
Hartford Strategic Income
Inflation fears haven't completely disappeared as investors remain nervous about higher oil prices despite the U.S.-Iran cease-fire. As such, long-term bond yields are up year to date and hovering around 4.3%. The market is also pricing in a strong probability that the Federal Reserve will hold short-term interest rates steady for the rest of 2026, which could further put a lid on bond yields.
With that in mind, a bet that yields could remain elevated seems reasonable. The Hartford Strategic Income ETF, which is flat this year, up nearly 11% over the past 12 months and sports a yield of 5.6%, looks like a solid way for investors to earn steady income.
The Hartford fund also benefits from diversification, with exposure that goes beyond plain vanilla U.S. Treasuries. While more than 40% of the fund's assets are in government bonds, the ETF also has about 55% of its portfolio invested in a mix of corporate bonds and securitized products such as collateralized loan obligations and mortgage-backed securities.
Investors can also take comfort from the fact that the fund's managers do not assume an inordinate amount of risk. More than half of the portfolio is invested in AAA or AA-rated bonds and less than 5% is below a B -- the riskiest area of sub-investment grade.
Capital Group Dividend Value ETF
Dividends are yet another way for investors to earn income in these choppy times. But there's also the added kick of even more appreciation that comes with owning more equities. The Capital Group Dividend Value ETF, which is up more than 2% this year and more than 40% over the past 12 months, has rewarded investors who want that mix of income and growth.
The fund doesn't invest in the highest-yielding stocks per se. In fact, it owns several megacap tech stocks, which tend to pay dividends with relatively small yields. Microsoft, Nvidia and Broadcom are the three largest positions while Meta Platforms is also a top 10 holding.
But there are enough investments scattered throughout more traditional dividend-oriented sectors as well that allows the fund to benefit from higher yields as well as diversification. Aerospace/defense contractor RTX, HVAC leader Carrier, Eli Lilly and British American Tobacco are also top 10 holdings.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 09, 2026 14:32 ET (18:32 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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