The vast majority of exchange traded funds currently available try to passively track the performance of a group of stocks or securities. However, the industry is actively trying to push through active ETFs that try to outperform the market.
With large players entering the actively managed ETF space, such as PIMCO‘s desire to launch an ETF version of its flagship Total Return Fund, investors might soon be able to choose from a larger pool of offerings. [Will PIMCO ETF Mark Beginning of the End for Mutual Funds?]
“It will be a tipping point for actively managed ETFs,” Noah Hamman, Washington, chief executive of Advisorshares, said of PIMCO’s move, Risk reports. “If it raises a lot of money, it will probably get a lot of other mutual fund companies very interested in the space.”
Still, those interested in active funds may want to step back and understand what they are getting into first.
- “Actively Managed ETF.” Just like the name indicates, these are ETFs that come with active managers overseeing the fund’s structure. An individual or a team will make decisions on the underlying portfolio’s allocation, similar to traditional mutual fund managers, shifting holdings and weightings at their own discretion in an attempt to outperform a similar benchmark index. In other words, the ETF will not follow a passive, purely rules-based investment strategy. [Active vs. Passive ETFs]
- Like a Mutual Fund? Active ETFs come with the advantages of mutual funds, but they also have lower expense ratios, better tax advantages, flexibility to trade during the day and up-to-date transparency on underlying component holdings.
- Caveat. While active ETFs have lower expense ratios as compared to their mutual fund counterparts, actively managed ETFs cost more than traditional passively indexed ETFs. Since the managers of the active ETFs make frequent rebalances or trades in the fund’s holdings, the management fees are higher.
For more information on active funds, visit our actively managed ETFs category.
Max Chen 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.