Traditional exchange traded funds (ETFs) track indexes, come in an array of varieties and tout many features: low cost, low turnover, broad diversification and lower expense ratios. The ETF world is dominated by passive investing, but there are other ETF investment strategies, Jim Mcwinney for International Business Times explains:
- Passive Investing
ETFs give a low-cost and simple way to implement indexing, which is also known passive management. - Active Trading
The liquidity of ETFs make it possible to trade them as you would single stocks. Market timing, sector rotation, short selling and buying on margin are possible strategies. Active trading is for investors looking for above-average returns. - Actively Managed ETFs
Although ETFs are structured to track an index, they could be created to track a manager’s top picks, which is an example of an actively-managed ETF. So far, Germany is the only country that has a truly actively-managed ETF. - Transparency and Arbitrage
Arbitrage keeps the price of the ETF close to the value of the underlying shares. With actively-managed ETFs, a money manager gets paid for stock selection. In theory, those selections will help investors outperform their ETF’s benchmark index. However, if the ETF disclosed its holdings often enough, there would be no reason to buy the ETF. Investors could buy the group of stocks on their own and not pay a management fee. Because of these technical challenges, actively-managed ETFs are not yet available in the U.S.
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