Four Things to Know About Active ETFs
Active ETFs offer the potential for outperformance, tax efficiency, flexibility, control and transparency.
Actively managed exchange-traded funds (ETFs) are another way for investors to access portfolios of securities, with the benefit of professional oversight. They offer some of the benefits of both mutual funds and passive—or index-based—ETFs. Active ETFs allow investors a choice in how to invest, with the same trading flexibility and potential for tax efficiency as passive ETFs combined with the active security selection from experienced portfolio managers.
Active ETFs offer the potential for:
- Outperformance: Active ETFs are managed by an experienced portfolio management team, who seek to outperform an index by selecting companies they believe are positioned for long-term growth. Passive ETFs are designed to closely track an index and typically won’t outperform it.
- Tax efficiency: ETFs, including active ETFs, typically don’t distribute capital gains as they’re structured differently than mutual funds. For taxable investment accounts, investors can better manage their taxable income.
- Flexibility and Control: Active ETFs may be purchased and sold throughout the trading day, giving investors better control over the price at which they can buy and sell their shares. ETFs have a lower minimum investment—a single share—which means that it’s easy to get started.
- Transparency: ETFs, including active ETFs, provide daily view of the portfolio holdings. Investors know every day what they own and how the underlying securities in the fund change over time. ETFs also offer transparency into trading costs that are represented in the bid/ask spread each investor pays when buying or selling the fund.