By Pam Krueger via Iris.xyz
Caution About Investing in a Popular Type of ETF
For years, exchange-traded funds, or ETFs, have been a smart way to invest — for the same reason people buy index funds. Traditional ETFs (known as passive ETFs) typically buy a basket of stocks or bonds to track or mirror a market index, while keeping fees low. Lately, though, growing numbers of investors have been putting money into actively managed ETFs or active ETFs. Zacks Investment Research said in a Seeking Alpha post that the number of unleveraged active ETFs has more than doubled between 2013 and 2017.
The Risk of Active ETFs
Problem is, active ETFs may be riskier than you think.
Unlike passive ETFs, actively managed ETFs take a hands-on investing approach. Instead of simply owning and then tracking an index, they typically hire a manager or team of portfolio managers who alter the investments comprising the underlying portfolio, hoping to do better than the index.
In some cases, the actively managed ETFs simply tweak the holdings of the index they follow to deliver specific strategies. This makes them not so much “active” ETFs as “adjusted” ETFs. For example, Vanguard’s smart beta ETFs add criteria to the basic indexes make them value or momentum ETFs.
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