What are actively managed ETFs and how can they benefit you?
How are actively managed ETFs different from passive ETFs?
From stocks to commodities to bonds, Exchange-Traded Funds (ETFs) are excellent tools for investors looking to diversify their investments because of the myriad asset types they accommodate.
Most ETFs are passive and aim only to replicate the performance of a broader index – such as the S&P 500. While investors may be more familiar with passive ETFs, which are the majority of ETFs, actively managed ETFs form a smaller but growing group of investment vehicles.
Actively managed ETFs involve hiring investment portfolio managers that curate the ETFs via a benchmark index. Unlike passive ETFs which aim to follow benchmarks closely, actively managed ETFs are allowed and expected to deviate from benchmarks and change factors as portfolio managers deem fit, in order to outperform the benchmarks.
What are the benefits?
Having actively managed ETFs allows you to entrust your funds to seasoned professionals.
Furthermore, actively managed ETFs, with their goal of outperforming benchmarks, may provide better chances of getting higher returns versus the benchmarks. This is especially so when compared to traditional, passive ETFs, which only aim to match benchmarks.
Lastly, due to the human touch that actively managed ETFs provide, they are more responsive to changes in the market. Portfolio managers can change and alter factors to help the funds grow better in response to market conditions.
How are they different from managed funds like unit trusts?
Actively managed ETFs are similar to unit trusts and mutual funds in that the fund managers of both make discretionary decisions to buy or sell, unlike passive ETFs that simply track an index.
But there are also differences. Actively managed ETFs can be sold and traded on the stock market throughout the day, making it a more liquid investment tool than mutual funds which can be bought or sold only at the end of a trading day. This allows more potential for making good, timely decisions that benefit your investments. In addition, actively managed ETFs tend to provide more transparency into their holdings than mutual funds.
Why are they increasing in popularity?
Due to the growing number of uncertainties in the current global economy and the resultant market volatility, active investment strategies like actively managed ETFs can offer an advantage. For instance, these ETFs can rapidly switch out affected companies in adverse events such as stock market crashes or rising inflation.
However, investors should note that actively managed ETFs do tend to have higher expense ratios compared to passive ETFs, but lower costs compared to actively managed mutual funds. There also remain questions of whether an actively managed ETF can and will outperform its passive counterpart.
the bottom line:
Managed ETFs may sound contradictory, but ETFs are not exclusive to indexers. It is important to know what kind of investor you are when choosing an ETF. In the case of actively managed ETFs, those looking to invest in an actively managed product may find them to be a more attractive option.
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