An actively managed ETF is a type of exchange-traded fund in which the underlying portfolio allocation is decided by a manager or team, rather than following a passive investment strategy.
Although an actively managed ETF will have a benchmark index, managers can adjust sector allocations, make market-time trades, and diverge from the index as they see suitable. This results in investment returns that aren’t exactly the same as the underlying index.
What is the difference between an active and a passive ETF?
- Over the last decade, ETFs have exploded in popularity, giving investors low-cost access to diversified holdings across a variety of indices, sectors, and asset classes.
- Buy-and-hold indexing methods that track a specific benchmark are common in passive ETFs.
- To outperform a benchmark, active ETFs employ one of several investment strategies. Active management is provided by passively holding an Active ETF.
- Passive ETFs are less expensive and more transparent than active ETFs, but they lack alpha potential.
Are active ETFs beneficial?
ETFs are intriguing because they are frequently less expensive and less tax efficient than mutual funds, and they may be traded at any time of day—sometimes for free. As the stock market grows more volatile, active management becomes more desirable, providing more opportunity for active managers to shine.
What are the advantages of actively managed ETFs?
- An investment manager or team is in charge of researching and making choices on the ETF’s portfolio allocation in an actively managed exchange-traded fund (ETF).
- While passively managed ETFs outweigh actively managed ETFs by a large margin, active ETFs have seen significant growth due to client demand.
- Active ETFs provide lower fee ratios than mutual fund alternatives, as well as the opportunity to trade intraday and the potential for bigger returns.
- Passively managed ETFs tend to beat actively managed ETFs over time.
What distinguishes an active ETF from a mutual fund?
- With different share classes and expenses, mutual funds have a more complex structure than ETFs.
- ETFs appeal to investors because they track market indexes, whereas mutual funds appeal to investors because they offer a diverse range of actively managed funds.
- ETFs trade continuously throughout the day, whereas mutual fund trades close at the end of the day.
- ETFs are passively managed investment choices, while mutual funds are actively managed.
Why are active exchange-traded funds less expensive than mutual funds?
When you want to buy or sell an active mutual fund, you can do it only once a day, at 4 p.m. ET, and at a price that you won’t know about until after the fact. This approach has the advantage of assuring investors that their shares would be traded at the fund’s net asset value (NAV). However, investors do not have access to this NAV in advance and do not know what the fund’s NAV is on a daily basis, as mutual funds only release the closing NAV at market close.
Because they are exchange-traded, like stocks, actively-managed ETFs differ greatly in this regard. This implies that, much like a stock, you may see the indicative value for an Active ETF at any time during the day.
However, note that I used the term “indicative value” rather than “net asset value.” An Active ETF’s share price may differ from the fund’s genuine NAV because it trades on the secondary market. The market maker or designated broker, on the other hand, has an incentive to keep the share price as close to the NAV as possible since they can arbitrage between the share price and the fund NAV, decreasing the divergence.
Because exchange-traded funds are available to buy and sell at any time when the market is open, investors may view the fund’s current price at any time, and they can utilize limit prices, margin, and even short the fund just like any other stock.
Lower Expenses
The expense ratios of most actively-managed ETFs are lower than those of the average active mutual fund that offers investors exposure to a similar strategy. This is due to the fact that ETFs are less expensive to operate than mutual funds and the fund administration process is simpler. ETFs do not require the same size shareholder service departments as mutual funds.
ETFs do not pay trailer fees to financial advisors who advocate them to investors, which is another crucial element that leads to cheaper expenses. Traditional investment advisors may receive a trailer charge of up to 1% on mutual funds, which is added to the total expense ratio (TER), which is the headline expense that investors see. As a result, Active ETFs are on average less expensive for investors than comparable active mutual fund strategies.
Vanguard ETFs are actively managed, right?
Vanguard launched a collection of six actively managed ETFs aimed at factor strategies more than two years ago. The move was nearly surprising, given that the company’s founder was a pioneer in the field of passive investing.
Despite the fact that John Bogle has advocated for cap-weighted indexing as a strategy for more than 40 years, Vanguard is a strong player in the active management area, with active techniques used in 70 of its 132 mutual funds.
Despite the fact that Vanguard is a big player in the active mutual fund industry, its active ETFs have lagged behind the rest of the company in terms of assets and performance. In terms of assets under management, they remain the lowest of the company’s 80 ETFs (AUM).
Seventeen of Vanguard’s ETFs have less than $1 billion in assets under management. The six factor funds have a total size of $37 million to $134 million, which is tiny change for a company like Vanguard.
Over a two-year period, we compared the performance of these six active ETFs to the dominant passive ETF in each category. The Vanguard funds trailed in each case, according to our findings.
Because those were the largest funds in their respective categories, we utilized the iShares single-factor ETFs and Goldman Sachs’ multifactor ETF.
The Vanguard U.S. Multifactor ETF (VFMF) appears to be the most equivalent to Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC), the largest multifactor ETF, with a market capitalization of approximately $10 billion. Both funds are focused on the factors of value, momentum, quality, and low volatility.
VFMF has a 0.19 percent expenditure ratio, whereas GSLC has a 0.09 percent expense ratio. VFMF has 572 holdings compared to 435 for GSLC, and they share three of the top ten components. Technology is the most heavily weighted sector in both funds, accounting for 23.73 percent in VFMF and 33.34 percent in GSLC.
VFMF has strong overexposure to the low size factor of 1.17 and the value component of 0.45, according to MSCI data. Momentum has a factor loading of 0.27, and quality has a factor loading of 0.19.
That technological weighting may be the primary point of differentiation, as the performance of the two funds diverges by about 30 percentage points in favor of GSLC over the two years ending Sept. 23. The sector has outperformed the S&P 500’s other sectors.
The $47 million Vanguard U.S. Quality Factor ETF (VFQY) seeks to replicate the performance of the quality factor by investing in stocks with good fundamentals. The $19 billion iShares MSCI USA Quality Factor ETF is the largest passively managed quality-focused ETF (QUAL). Despite being an index fund, QUAL is the more expensive of the two, charging 0.15 percent versus 0.13 percent for VFQY.
In their top ten holdings, the two funds only have one stock in common: Apple. Again, technology is the greatest holding for both, but while it accounts for a quarter of VFQY’s total weight, it accounts for more than 36% of QUAL’s.
According to MSCI data, the iShares ETF has considerably more exposure to the quality element, with a quality score of 0.46 vs 0.27 for VFQY. Surprisingly, the low size factor, at 1.23, is VFQY’s largest factor exposure.
The performance gap, which is roughly 18 percentage points in favor of QUAL, appears to be driven once again by sector disparity.
The Vanguard U.S. Value Factor ETF (VFVA) is the largest in the Vanguard factor ETF family, with $118 million in assets. It has a counterpart in the $6.7 billion iShares MSCI USA Value Factor ETF (VLUE). VFVA is less expensive than index-based VLUE, with a 0.14 percent fee compared to 0.15 percent for VLUE.
With 151 holdings, VLUE is a considerably more concentrated portfolio than VFVA, which has 756 components. In their top ten holdings, the funds have five of the same companies. With a weighting of 28.24 percent, financials is VFVA’s largest sector, while technology, which isn’t even in VFVA’s top three, is VLUE’s largest sector, accounting for 25 percent of the portfolio.
VFVA has a larger exposure to the value factor (0.98 vs. 0.84) than VLUE. Low size, on the other hand, is VFVA’s greatest factor loading, at 1.43.
At the end of the two-year period, VFVA was more than 8 percentage points behind VLUE.
The Vanguard U.S. Momentum Factor ETF (VFMO), which has a market capitalization of $60 million, has a counterpart in the iShares MSCI USA Momentum Factor ETF, which has a market capitalization of over $12 billion (MTUM). Again, the iShares fund is more expensive, at 0.15 percent, it costs 2 basis points more than the Vanguard fund.
VFMO has a larger portfolio than MTUM, with 661 holdings to 127. Despite the fact that Tesla is the largest investment in both funds, VFMO weights it at 1.88 percent, while MTUM weights it at 6.53 percent, a substantial discrepancy. In total, the funds have four securities in common among their top ten holdings.
Technology is once again the most important sector for both, but the disparity in weighting is less pronounced. Nearly 32% of VFMO’s portfolio is made up of technology equities, while nearly 41% of MTUM’s is made up of them. Momentum is the largest factor exposure for MTUM, at 0.85, while it is 0.71 for VFMO, with a loading of 1.02 for the Vanguard fund.
At the end of the two-year period, the performance gap between the two was over 15 percentage points, with VFMO lagging MTUM.
The Vanguard U.S. Minimum Volatility ETF (VFMV), which has a market capitalization of $73 million, uses a proprietary model that evaluates multiple categories of risk rather than just looking for low volatility. The $34 billion iShares MSCI USA Min Vol Factor ETF is its index-based equivalent (USMV). The Vanguard fund has a 0.13 percent fee ratio, whereas the iShares fund has a 0.15 percent expense ratio.
With only 127 stocks, VFMV has the least number of holdings among the Vanguard factor ETFs, whereas USMV has 196. Only two of their top ten holdings, Verizon Communications and Merck, are the same. Technology is the top sector for both funds, although the Vanguard ETF has a bigger weighting for the sector than the iShares ETF, at nearly 29 percent vs 18 percent.
In terms of factor exposures, neither fund’s strongest factor exposure is low volatility. With a size exposure of 1.07 and a volatility exposure of 0.39, VFMV is a low-risk investment. Meanwhile, yield, at 0.26, and low volatility, at 0.11, are the two most important factors for USMV.
Nearly 15 percentage points separated the funds’ performance results at the end of the two-year period.
Vanguard has dismissed the concept that size is an issue, claiming that illiquidity, not small size, is the cause of outperformance. We compare the $36 million Vanguard U.S. Liquidity Factor ETF (VFLQ) to the $696 million iShares MSCI USA Size Factor ETF (SIZE). The expense ratio of the iShares fund is 1 basis point more than that of the actively managed Vanguard fund, which is 0.14 percent.
With these two funds, portfolio size is less of a problem. SIZE has 620 holdings compared to 779 for VFLQ. They don’t share any of their top ten holdings, and technology isn’t their major industry.
Instead, financials is the largest sector for both VFLQ and SIZE, with 32.8 percent for VFLQ and 21 percent for SIZE. However, technology is the second-largest sector in SIZE, while it is the fourth-largest in VFLQ.
Despite its concentration on the liquidity factor, VFLQ has the higher factor exposure to low size, with an exposure of 1.66, whilst SIZE has an exposure of 0.61 to the same factor.
The funds’ performance differential at the end of the two-year period appears to be driven by technology exposure and small-size exposure, with VFLQ behind SIZE by 15 percentage points.
Vanguard is recognized for its passive investing, but it doesn’t skimp on active management, offering a wide range of actively managed mutual funds. It’s remarkable that its actively managed ETFs underperform similarly managed passive products by such a large margin.
The Vanguard ETFs, on the other hand, are often underweight in the technology sector, which has outperformed in recent years. Similarly, many Vanguard funds have significant low-size factor exposure, and small caps have recently underperformed.
What are the most popular exchange-traded funds (ETFs)?
In a rising stock market, the ETF business has seen spectacular expansion in recent years, amassing massive assets. As a result, the ETF market has enough liquidity, with most funds trading at extremely high volumes.
The number of shares traded in a certain period can be used to calculate volume. A larger number of shares makes it easier to trade in and out of a product, reducing bid/ask spreads.
In reality, higher volume makes it easier to create and redeem shares in the fund basket, which is a common and important process in ETFs. This is especially true because authorized participants (AP) can build new ETF baskets for underlying securities or redeem them when needed. As a result of this phenomena, ETFs can trade in lockstep with their net asset value (NAV).
Average Daily Volume: 53.5 million shares for the Financial Select Sector SPDR Fund XLF.
Average Daily Volume: 37.9 million shares for the iShares MSCI Emerging Markets ETF EEM.
Which ETF has the most active management?
Active Management ETFs have a total asset under management of $290.85 billion, with 780 ETFs trading on US exchanges. The cost-to-income ratio is 0.69 percent on average. ETFs that invest in active management are available in the following asset classes:
With $18.46 billion in assets, the JPMorgan Ultra-Short Income ETF JPST is the largest Active Management ETF. The best-performing Active Management ETF in the previous year was KRBN, which gained 115.09 percent. Gabelli Asset ETF GAST was the most recent Active Management ETF to be launched on 01/05/22.
What are some examples of active funds?
Let’s look at some examples to help us comprehend. Actively managed funds include equity mutual funds, debt mutual funds, hybrid funds, and fund of funds.
A professional fund manager, just like in the case of an equity fund, selects which stocks will go in and out of an equity fund based on the performance of bigger markets and economies as well as the individual performance of the stocks.
The fund manager must also decide if the present stocks will maintain their concentration or whether the amounts invested in particular stocks should be raised or lowered.
In other words, the success of an equity fund is heavily influenced by the fund manager. We’ll use an equity fund as an example. The situation is the same for all other active management fund categories.
Do active exchange-traded funds (ETFs) pay capital gains?
- Because of their easy, broad, and low-fee techniques, ETFs have become a popular investment tool. There are no capital gains or taxes when ETFs are merely bought and sold.
- ETFs are often regarded “pass-through” investment vehicles, which means that their shareholders are not exposed to capital gains. However, due to one-time significant transactions or unforeseen situations, ETFs might create capital gains that are transmitted to shareholders on occasion.
- For example, if an ETF needs to substantially rearrange its portfolio due to significant changes in the underlying benchmark, it may experience a capital gain.