What Is an Actively Managed ETF?
An actively managed ETF is an exchange-traded fund with a manager or team making decisions on the underlying investments in the fund. Often, an actively managed ETF tracks a benchmark index, but managers may change sector allocations, market-time trades, or deviate from the index as they see fit to try and meet the fund's objectives.
Key Takeaways
- An actively managed ETF is an exchange-traded fund with a manager or team making decisions about the holdings.
- Generally, an actively managed ETF does not adhere to any passive investment strategy.
- Many actively managed ETFs track a benchmark index, but managers may deviate from it as they see fit.
- Advantages to actively managed ETFs include lower expense ratios than mutual funds and the participation of seasoned financial professionals.
- Many actively managed ETFs have higher expense ratios than passively-managed index ETFs, which puts pressure on fund managers to consistently outperform the market.
How an Actively Managed ETF Works
An actively managed ETF features many of the same benefits of a passively managed exchange-traded fund, like price transparency, liquidity, and tax efficiency, but with a fund manager that can adapt the fund to changing market conditions. The combination of active management and an ETF provides investors with an innovative solution to asset management.
For investors, there is enough to like about actively managed ETFs, such as lower expense ratios than mutual funds and the active participation of seasoned financial professionals. Because these funds only employ highly experienced and proven managers, there is a possibility of gaining benchmark-beating returns.
There are no guarantees thatan actively managed fund will underperform or outperform a passive ETF rival, even with the skills of the managers. Traditional ETFs can at least be counted on to follow an indexfaithfully, which allows investors to knowthe holdings and risk profile of the fund. This helps keep a diversified portfolio in line with expectations.
Fund managers of an active ETF, however, have the freedom to trade outside of abenchmark index, which makes it more difficult for investors to anticipate the future makeup of the portfolio. This can work for investorswhen market conditions experience heavy volatility. An active manager can shift allocationsaway from underperforming positions to more appropriate sectors or asset classes.
In 2018, asset management giant Vanguard rolled out a catalog of actively managed ETFs. The move was a sharp departure from the index-based strategy championed by founder John Bogle for multiple decades.Many of these funds have become popular investment avenues.
Limitations of an Actively Managed ETF
Although actively managed ETFsshare many characteristics ofpassive exchange-traded funds, they tend to come at a premium. Many have higher expense ratios than passive index ETFs, which puts pressure on fund managers to work hard to outperform or beat the market.
As with an actively managed mutual fund, the potential to outperform comes down to the manager's abilities. Some will regularly beat expectations, but most research finds active management to underperform a passive strategy.
Furthermore, actively managed ETFstend to contradict basic investment principles like diversification. The typical fund manager shifts allocations according to market conditions, meaning the fund may be less diversified than a passive ETF.
What Is an Actively Managed ETF?
Actively managed ETFs are not based on an index, instead seeking to achieve a chosen investment objective by investing in a portfolio of bonds, stocks, and other assets. With this type of investment, an advisor may actively buy or sell components in the portfolio regularly without regard to conformity with an index.
What Is the Most Active ETF Sector?
Actively managed ETFs are a popular investment for many investors, with funds flowing constantly in and out of them. According to Fidelity, the most active ETF sector for inflows in 2023 was technology, while healthcare was the most active for outflows.
Is an Actively Managed ETF the Same as a Mutual Fund?
Mutual funds and ETFs are similar in that they both pool funds and assets together and can be actively or passively managed, but that is where the similarities end. The most significant difference is when they can be traded—mutual funds can only be traded after market hours, while ETFs trade throughout the day.
The Bottom Line
Actively managed ETFs are investment vehicles that pool funds and hold a basket of assets while focusing on a specific strategy, such as ETFs that hold covered calls. When an asset fails to meet performance goals, the managers swap it for another, better-performing asset to ensure the fund maintains its returns.
Fees are generally higher in actively managed ETFs because of the activity involved, but this doesn't mean they're not appropriate for an investor's goals. If the fund's performance outweighs the fees, it might be an attractive opportunity for someone who can afford it or doesn't mind paying more for better performance. Conversely, the higher fees can eat into returns, so investors who can't afford them or don't want to pay more should avoid them.
FAQs
An actively managed ETF is an exchange-traded fund with a manager or team making decisions about the holdings. Generally, an actively managed ETF does not adhere to any passive investment strategy. Many actively managed ETFs track a benchmark index, but managers may deviate from it as they see fit.
What does actively managed ETF mean? ›
Actively-managed ETFs are exchange-traded funds that hire specialists to pick and choose assets for investments, rather than seeking to replicate an index or sector. These funds combine the management strategy of a mutual fund with the ability to buy and sell the fund throughout the trading day.
What is a drawback of actively managed funds? ›
Disadvantages of Active Management
Actively managed funds generally have higher fees and are less tax-efficient than passively managed funds. The investor is paying for the sustained efforts of investment advisers who specialize in active investment, and for the potential for higher returns than the markets as a whole.
Are actively managed ETFs and aim to outperform the market? ›
While many ETFs are designed to passively track an index or benchmark, an actively managed ETF is a fund with a manager or team making decisions about the holdings. They generally try to outperform a market index or other benchmark. While actively managed ETFs have existed since 2008, demand for them is rising.
What is the difference between an ETF and an active ETF? ›
Passive ETFs typically track an index (such as the S&P 500 index) and the portfolio is updated regularly (generally quarterly) to reflect changes in the reference index. Active ETFs, where an investment manager is actively managing a portfolio of securities, have existed globally for some time.
What are the advantages of actively managed ETFs? ›
Advantages relative to some other investments include:
- Potentially higher returns. ...
- Potentially lower cost vs. ...
- Tax efficiency. ...
- Flexibility.
Active managers develop and use various risk-assessment tools and metrics to gauge overall risks such as equity market risk, interest rate risk, credit risk, and liquidity risk. By doing this, they can reduce exposure to high-risk assets and seek safer investments to protect investors' capital.
What are the pros and cons of active management? ›
Active management has benefits, such as the potential for higher returns, the ability to adjust to market conditions, and the opportunity for diversification. However, active management also has drawbacks, such as higher fees, difficulty in consistently outperforming the market, and the risk of human error.
What are the 3 disadvantages of active investment? ›
However, an active investment strategy also has certain limitations like:
- More expensive: Actively buying and selling a stock or mutual fund asset adds transaction fees, making active investing costlier than passive investing.
- High tax bill: Active managers have to pay high taxes for their net gains yearly.
They come with many advantages, such as advanced portfolio management, risk reduction, and dividend reinvestment; however, there are many disadvantages to consider as well, such as high expense ratios and sales charges, tax inefficiencies, and possible management abuses.
As global stocks and bonds roared back to life in the first half of 2023, so did the fund managers that actively buy and sell them. Over the 12 months through June 2023, 57% of actively managed funds survived and beat their average passive peer, their highest success rate in years.
What is the most actively managed ETF? ›
7 Best Actively Managed ETFs
| Actively managed ETF | Expense Ratio | One-year Performance* |
|---|
| Blackrock Large Cap Value ETF (BLCV) | 0.55% | 27.8%** |
| Fidelity Magellan ETF (FMAG) | 0.59% | 40.5% |
| Invesco Active U.S. Real Estate Fund (PSR) | 0.35% | 3.6% |
| JPMorgan Equity Premium Income ETF (JEPI) | 0.35% | 14.9% |
3 more rowsApr 18, 2024
ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. And, in general, ETFs tend to be more tax efficient than index mutual funds.
What are the risks of active ETFs? ›
Five of the key ETF risks to consider include: market risk, tracking error, liquidity, sector concentration, and single-stock concentration.
What percentage of ETFs are actively managed? ›
Exchange-traded funds used to be synonymous with passive investing. But since the beginning of 2019, actively managed ETFs' share of the US ETF market has more than quadrupled—from just over 2.0% to 8.5% as of March 31, 2024.
Are ETFs more actively managed than mutual funds? ›
How are ETFs and mutual funds different? How are they managed? While they can be actively or passively managed by fund managers, most ETFs are passive investments pegged to the performance of a particular index. Mutual funds come in both active and indexed varieties, but most are actively managed.
Are actively managed ETFs good? ›
Advantages to actively managed ETFs include lower expense ratios than mutual funds and the participation of seasoned financial professionals. Many actively managed ETFs have higher expense ratios than passively-managed index ETFs, which puts pressure on fund managers to consistently outperform the market.
What is the difference between active and passive managed ETF? ›
Passive ETFs tend to follow buy-and-hold strategies to try to track a particular benchmark. Active ETFs utilize a portfolio manager's investment strategy to try outperform a benchmark. Passive ETFs tend to be lower-cost and more transparent than active ETFs, but do not provide any room for outperformance (alpha).
Is it better to invest in a managed fund or ETF? ›
Managed Funds are better for investing smaller amounts more frequently as they don't incur brokerage costs, giving your money the chance to accumulate market gains more quickly than ETFs.
Is QQQ an actively managed fund? ›
Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund's return may not match the return of the Underlying Index.
