The Benefits of Active ETFs for EM Exposure | ETF Trends

Many advisors have historically gotten emerging markets exposure from a passive ETF or a mutual fund, but there are numerous benefits to switching to active ETFs when tax-loss selling.

Matthews Asia has a long history of offering active management expertise to investors, traditionally through mutual funds and separately managed account wrappers. However, in July, the firm began offering several of its active strategies in an ETF wrapper.

The Matthews Emerging Markets Equity Active ETF (MEM), the Matthews Asia Innovators Active ETF (MINV), and the Matthews China Active ETF (MCH) are based on the firm’s existing, well-established strategies. 

For advisors currently getting emerging markets exposure from a mutual fund, an active ETF offers increased tax efficiency. The creation/redemption mechanism at the heart of the ETF structure affords the vehicle the potential for better tax efficiency, as there are less capital gains distributions, according to an insight from Matthews Asia. Active ETFs can leverage this for markets that are in-kind, for daily inflows and outflows, and for portfolio rebalancing, according to the firm.

A well-known benefit of ETFs is increased transparency – but going with a passive fund is not the only way to access this benefit. MEM, MINV, and MCH use a fully transparent, active structure, meaning they will publish their portfolio holdings comprising that day’s net asset value.

With active ETFs, current fund shareholders are not impacted by the trading activity of others because ETFs trade on an exchange and investors interact with an intermediary and not the fund directly. Thus, each investor’s buy or sell trading costs are represented in the bid/ask spread at which they execute. Creations and redemptions occur at NAV + trading costs, according to Matthews Asia.

Finally, unlike mutual funds and other pooled investment vehicles, there is no minimum to invest in ETFs. Investors may purchase as little as one share, accessing the full, diversified portfolio exposure, according to Matthews Asia.

For more news, information, and strategy, visit the Emerging Markets Channel.