The passive, indexed approach is what has fueled most of the growth in exchange traded funds, but now the business is moving toward actively managed ETF strategies. Therefore, investors need to understand the differences, sometimes subtle, between active and passive ETFs.
ETFs were originally made to passively mimic or reflect the performance of an underlying benchmark index. To this day, the majority of ETF products available simply track a basket of securities. [PIMCO Total Return ETF Could Upend Mutual Funds]
However, there are some investors who prefer active strategies over an indexed approach. Despite the fact that only a minority of actively-managed funds have beat the market on a consistent basis, some would rather follow active trading strategies that try to take advantage of short-term moves.
Active ETFs, though, have not taken off, at least not yet. Many fund providers have been wary about offering active strategies as ETFs disclose component holdings. Fund managers who get paid for their stock picking expertise would rather not disclose their picks. [Active ETFs Seen Taking Off in 2012]
Still, some major players are offering actively managed stock and bond ETFs. For example, State Street Global Advisors stated recently that it is planning to launch active funds soon. [State Street Eyes Active ETF Business]
PIMCO also announced its big splash into the active ETF space, with the launch of an ETF version of its flagship Total Return Bond Fund. [Pimco Total Return ETF on Tap for 2012?]
For more information on active funds, visit our actively managed ETFs category.
Max Chen contributed to this article.