What Role Can Active ETFs Play in a Portfolio? | ETF Trends

Actively managed ETFs have had a very strong 2023, picking up new interest. Active funds picked up 23% of total ETF inflows as of August 11th despite holding 4% of total AUM at that time. So how should investors and advisors respond, and what role can active ETFs play in a portfolio?

Rising interest in active ETFs has even reached institutional investors, nearly a quarter of whom are looking to invest in active ETFs in the next 12 to 24 months. Trackinsight’s Global ETF Survey of 2023, which came out over the Summer, found that most respondents planned to up their active ETF allocation in the next two to three years, as well.

See more: These Sectors Are Standing Out For H2 2023

Why might investors be looking to add active ETFs? Active strategies can adapt to a variety of market situations. With uncertainty about a potential recession next year, for example, amid the Fed’s ongoing fight to tame inflation, active strategies could make a prudent addition.

At the same time, they can also adapt to seek upside, taking openings where they see them. In a market environment defined by a “hurry up and wait” narrative about outside events, both trends could appeal.

Digging into Active ETFs

Actively managed strategies work differently from their passive counterparts. Whereas passive strategies are often required to track an index, active strategies have a broader remit. Their experienced managers don’t have the same requirement for an index committee to meet and decide before they can adapt.

So, then, what role can active ETFs play in a portfolio to complement their indexed peers? Active ETFs can take an “upside seeking” role in a portfolio, taking a “total return” approach, for example. At the same time, active ETFs can also package more defensively-minded strategies. They can make for an intriguing counterbalance to a concentration risk-laden equities market.

Investors have many options in the world of ETFs, but active strategies are increasingly jostling for a role. Adding active funds gives a broader range of options than passive-only strategies without losing out on liquidity, fee transparency, and tax benefits in the ETF wrapper itself. As the “year of active” draws to a close, it may be time to consider an active perspective.

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