Actively managed exchange traded funds (ETFs) have been greeted with a certain amount of skepticism by investors, but experts expect the class to show major growth in the coming years.
There are about 19 active ETFs trading today, and a whole lot more in the pipeline awaiting approval.
One reason active ETFs have been slow to come to market is that many fund companies have had to wait a year or two for approval by the Securities and Exchange Commission (SEC). Another growth hindrance has been the disclosure requirement – all ETFs have to be transparent – something that doesn’t sit easy with many managers who would rather keep portfolio moves on the down low. [Actively Managed ETFs Reach A Milestone.]
Some of the reasons to like active ETFs include:
- Lower Fees: The fees are lower in comparison to mutual funds. According to Morningstar, the average annual fee of an actively-managed U.S. stock mutual fund is 1.39%, while the average fee for an active U.S. stock ETF is only 0.82%.
- More Liquidity: ETFs trade on exchanges like stocks, so investors can buy and sell shares of an ETF throughout the day.
- More Transparency: ETFs release a list of their holdings on a daily basis, while mutual funds generally report holdings on a monthly or quarterly basis.
- More Tax Efficiency: Essentially, ETF investors don’t have to pay taxes on their capital gains until they sell.
If you’re considering an active ETF, review the three-year track record. Though the absence of such a track record has been another hurdle in the growth of this ETF type, once the three-year mark has been passed, we’ll likely see a jump in assets and interest.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.