Exchange traded funds continue to increase in number and popularity, growing to one of the most commonly traded securities on the stock exchange as both institutional and the average retail investor gain greater access to broad or specialized market exposure. Yet many individuals are unfamiliar with ETFs’ inner workings. In this ongoing series, we hope to address your questions and help shed light on the investment vehicle. [What is an ETF? — Part 10: Adhere to a Strategy]
Actively managed exchange traded funds, ETF managed portfolios or simply active ETFs include a manager or a team of analysts that help make informed decisions on the underlying portfolio’s allocations in an attempt to provide above-average returns. In other words, they do not follow the passive indexing found in most ETF strategies. [What is an ETF? — Part 2: Indexing]
The team behind the fund will have the freedom to trade outside of a benchmark index and the flexibility to take advantage of short-term moves within the markets. Accordingly, active funds may under- or outperform a similar benchmark index, depending on the skill and prowess behind the management team.
Since there is an active management team behind the ETFs’ daily operations, investors will have to dish out a higher than average expense ratio to cover the management fees. Potential investors should keep in mind that the ETF industry average expense ratio is about 0.55%.