There are many actively managed ETFs in the pipeline but so far this segment of the business has grown in fits and starts. Most of the industry’s assets are in passively managed ETFs that follow indices.
“Actively managed ETFs still account for a scant percentage of overall exchange traded products assets and the actively managed space is dominated by just a handful of funds. However, the number of new entrants to the arena continues to expand, giving investors ample opportunity to consider the merits of active management,” according to Benzinga. [Many Active ETFs Struggle to Survive]
Many investors may be pondering if these types of ETFs belong in their portfolios. Robert Powell for MarketWatch reports that active ETFs try to outperform traditional benchmarks rather than replicate them.
Stephan Horan of the CFA Institute says what the choice between active or passive ETFs boils down to is the pros and cons of ETF investing versus traditional mutual funds.
First, when it comes to passive investing, the pros include low fees, lower transaction costs and the stable performance relative to a certain benchmark. “Active management, by contrast, provides an opportunity for some investors to outperform a benchmark even if the data suggest that the odds are against them,” said Horan.
The costs and fees for actively managed ETFs are comparable to a mutual fund. [PIMCO Helps Put Actively Managed ETFs on the Map]
When it comes down to long term investment strategies, intraday trading, an attribute of all ETFs, is not that important. The ability to trade throughout the day can cause more harm, as investors may be compelled to trade simply because they can. In turn, this can add up the transaction costs.
When the comparison is between passive ETFs versus active ETFs, the possibility for both of them to deviate from intraday indicate value is present in both. “Actively managed ETFs can trade at a premium to intraday indicative value, which is a risk that investors in actively managed ETFs need to manage. With an open-ended mutual fund, there is no deviation from NAV, which is published after each trading day,” David Zuckerman of Zuckerman Capital Management said. [Index Providers Take on Active Management with ETFs]
Overall, the choice of using an active ETF versus a passive ETF is up to an investor. The same benefits that pertain to regular index ETFs all apply to actively managed ETFs, so the question is not about either’or, it just depends on what strategically fits into an individual’s portfolio. Lucky for investors, the choices are about to get plentiful.
Tisha Guerrero contributed to this article.