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Why are active ETFs becoming so popular?

active_etfsWhat are active ETFs and why are they suddenly so popular? Nicholas Pratt explains all you need to know.

An active ETF has all the main properties of a passive ETF but the fund manager is able to deviate from the benchmark index and take active investment decisions about the underlying portfolio. The active ETF reflects, but does not mirror, the benchmark index and so there is a chance of higher returns.

Providers sometimes describe them as “enhanced” ETFs with all the attractions of a standard ETF (price transparency, daily liquidity, tax efficiency, low fees) but with the potential to generate returns above the index.

Having an active manager makes the ETF more agile in the sense of being able to react to market volatility by shifting away from underperforming positions.

However, allocating investments based on market conditions could make the fund less diversified than a true passive.

The existence of active ETFs creates a conundrum: Is an active ETF a cheaper version of an active fund, or a more expensive version of a passive fund? And are these products aimed at active management devotees who want a more economical product, or are they aimed at passive investors who want someone to at least avoid the worst securities in an index?

The answer is all of the above. 

Read the full report on active ETFs here: Exchange-traded funds explainer: Active ETFs with flying colours?

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