An Issuer’s Perspective on Launching Active and Passive ETFs

Indexing and passive funds have lorded over the ETF landscape for years, but with an influx of active funds coming to market and more investors allocating assets into active funds than ever before, understanding why issuers decide on one fund type versus the other when launching a new ETF can help advisors and investors better understand the process. Alpha Architect broke down the benefits and costs of active compared to indexed ETFs from an issuer’s perspective in a recent insights post.

Passive ETFs can be a good solution if an issuer is looking for increased transparency across the board, although there are an increasing number of active ETFs that are also transparent. They can easily show backtesting performance within certain guidelines, which is seeing how a particular strategy would have performed using historical data.

Indexed ETFs can also have an easier due diligence process for the fund issuer, and can be much faster to onboard for large wirehouses moving the fund onto their platforms. Indexed products a lot of times can be less hassle overall and can potentially require less upkeep than an actively managed ETF.

Active ETFs can be a good solution for an issuer because they can carry potentially lower costs than their indexing peers for the issuer on a variety of fronts. Active funds do not require an index calculation agent — the entity responsible for calculating and publishing the level of the index — and they do not need to pay data licensing fees from indexes. Active ETFs can also potentially have lower costs for issuers because managing index compliance and the associated costs and burdens from that are lighter.

Active funds provide much more flexibility for an issuer, which can be a huge boon to them, particularly when seeking alpha in volatile markets. Because of the nature of active funds, they can have a lot more ways to respond to changing market conditions, which can be an attractive benefit for an issuer. There is also less intellectual property flight from active funds.

It used to be that indexed funds were more tax-efficient than their active counterparts, but this is no longer the case, and both types of ETFs share the same tax benefits.

Active management firm T. Rowe Price currently offers eight actively managed ETFs with a variety of strategies for investors to align their risk exposures and investment goals. Active ETFs offered include the T. Rowe Price Dividend Growth ETF (TDVG), the T. Rowe Price U.S. Equity Research ETF (TSPA), and the T. Rowe Price Ultra Short-Term Bond ETF (TBUX).

The firm brings a bevy of experience and research to its products, with portfolio managers averaging over 20 years in investing each, as well as over 400 investment professionals dedicated to researching companies within ETFs.

For more news, information, and strategy, visit the Active ETF Channel.