In our recent post on actively managed exchange traded funds (ETFs) being closer to a reality than ever before, reader Marketworth wanted to know the difference between an actively managed ETF and a traditional one.

We’re here to help.

Traditional ETFs track underlying indexes, which for the most part, don’t change a whole lot. In some, there is quarterly rebalancing, while in others, the components are changed once every few years (as in the Dow Jones industrial average). It’s known as passive management: investors are not trying to beat the market, they’re just playing alongside it.

It’s a reason ETFs are relatively cheap when compared with mutual funds; there’s no need for a manager to move things around. With an index, you more or less can set it and forget it and you always know what you own.

Actively managed ETFs operate more like mutual funds. Behind them, instead of an index, will be a manager who will be doing the research, then picking and choosing securities based on the findings. That manager isn’t working for free, either, and the fees are passed on to the investor.

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