Should I Invest in Passive or Active ETFs? | ETF Trends

As investors consider the best type of investment for the current market environment, many will be weighing the pros and cons of passive and actively managed exchange traded funds to get the most bang for their buck.

Index-based, passive ETFs have proven to outperform active funds over the long term, but swift market changes and heightened volatility could help some active managers stand out.

“Active managers probably do their best work in times like this of market dislocation and stress,” Scott Ford, president of affluent wealth management at U.S. Bank, told Bloomberg.

In the long-term, passive strategies could win out by just passively tracking the benchmark. According to S&P Dow Jones Indices’ SPIVA scorecard, 83% of active large-cap funds have underperformed the S&P 500 benchmark for the past decade and 85% of active strategies fell behind last year.

“I was an active money manager for 30 years of my career, and now I’m all about how [passive] ETFs can solve all your problems,” Diane Pearson at Pearson Financial Planning, told Bloomberg.

Long-term investors will also favor passive, index-based ETFs because of the investment tool’s tax-efficient nature and relatively low-cost fees.

“Passive investments are lower in cost, provide broad market exposure, and are more tax efficient than active investments,” Jason Dall’Acqua, president of Crest Wealth Advisors, told Bloomberg. “However, passive investments provide no risk management — you own the best and the worst companies of the index the investment tracks.”

During periods of greater unrest, active managers have a chance to prove their mettle. In the first five-and-a-half month period of 2022, 58% of active large-cap mutual funds outperformed their benchmarks, according to Strategas Securities data. While these active funds still suffered a negative return, the fall-off was only a 12.3% drop on average, compared to the 17% decrease in the S&P 500 for the same period.

“If you’re outperforming on the downside, that has a risk-management benefit to you as an investor and that shouldn’t be under-appreciated,” Dan Hunt, head of portfolio construction and investment tools at Morgan Stanley, told Bloomberg.

Given the benefits of both active and passive strategies, some might argue that investors should include both methodologies for a more balanced portfolio.

“In our view, we think that both can have an enduring role in a client’s portfolio,” Dan Reyes, head of the portfolio review department at Vanguard Group Inc, told Bloomberg.

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