But an investor should note the rationale behind active management. There is an opportunity for higher returns compared to a benchmark, but it comes with higher average expenses, potentially increased tracking error and risk of under-performing. Indexes try to mirror a benchmark with lower expenses and relatively smaller tracking errors. Therein lies the benefit of ETFs.
For many investors, it’s easier and more cost-effective to just buy the index and follow along with it. Even better is having an entry and exit strategy to dictate when you’re in and when you’re out.
There are also actively managed ETFs available now, which come in a less expensive form than similar-style mutual funds. Mutual fund enthusiasts feel somewhat protected that active ETFs will not pose much of a threat to the industry already in existence, and that these types of ETF still face a number of bumps in the road before they will be embraced by all investors. But active ETFs are still in their early stages, and we’ve been in challenged markets. They’re going to be a force to be reckoned with when a recovery begins.
Max Chen contributed to this article.