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.
Are actively managed exchange-traded funds (ETFs) beneficial?
Actively managed ETFs have the potential to beat the benchmark through investing decisions made by portfolio managers and research analysts, whilst passively managed ETFs try to replicate the performance of a benchmark. Of course, the fund could also underperform its benchmark. Potentially less expensive vs.
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 is the difference between a mutual fund and an actively managed ETF?
- In past years, mutual funds were generally actively managed, with fund managers actively purchasing and selling securities inside the fund in an attempt to beat the market and assist investors benefit; however, in recent years, passively managed index funds have grown increasingly popular.
- While ETFs were traditionally passively managed because they tracked a market index or sector sub-index, a growing number of actively-managed ETFs are now available.
- ETFs and mutual funds are distinguished by the fact that ETFs can be bought and sold like stocks, whereas mutual funds can only be purchased at the conclusion of each trading day.
- Fees and expense ratios for actively managed mutual funds are often higher than for ETFs, reflecting the greater operating costs associated with active management.
- Mutual funds can be open-ended (where trading takes place between investors and the fund and the number of shares available is unlimited) or closed-end (where the fund issues a fixed number of shares regardless of investor demand).
- Exchange-traded open-end index mutual funds, unit investment trusts, and grantor trusts are the three types of ETFs.
How are actively managed ETFs profitable?
Because actively managed ETFs are more difficult to create, they are not as commonly available. All of the primary challenges that money managers face are related to a trading complexity, notably a complication in the role of arbitrage for ETFs. Because ETFs are traded on a stock market, price differences between the trading price of the ETF shares and the trading price of the underlying assets are possible. Arbitrage becomes possible as a result of this.
If the price of an ETF is lower than the price of the underlying stock, investors can profit from the difference by purchasing ETF shares and then exchanging them for in-kind distributions of the underlying company. Investors can short the ETF and cover the position by purchasing shares of stock on the open market if the ETF is trading at a premium to the value of the underlying shares.
Arbitrage keeps the price of index ETFs near to the value of the underlying shares with index ETFs. This works because everyone is aware of the index’s holdings. By declaring their holdings, the index ETF has nothing to fear, and price parity is in everyone’s best interests.
An actively managed ETF, whose money manager is compensated for stock selection, would be in a different scenario. Those choices should, in theory, help investors exceed their ETF benchmark index.
There would be no motivation to buy the ETF if it published its holdings frequently enough for arbitrage to occur; clever investors would just let the fund management conduct all of the research and then wait for the revelation of their best ideas. The investors would then purchase the underlying securities, so avoiding the fund’s management costs. As a result, money managers have little motivation to establish actively managed ETFs in such a circumstance.
However, in Germany, Deutsche Bank’s DWS Investments business produced actively managed ETFs that reveal their holdings to institutional investors on a daily basis with a two-day delay. However, the information is not released to the broader public until it has been one month. This setup allows institutional traders to arbitrage the fund, but also feeds the general public outdated information.
Active ETFs have been permitted in the United States, but they must be transparent about their daily holdings. In 2015, the Securities and Exchange Commission (SEC) disallowed non-transparent active ETFs, but it is now considering several models of regularly reported active ETFs. On volatile days involving ETFs, the SEC has also permitted opening stock trading without price disclosures to avoid the record intraday drop that occurred in August 2015, when ETF prices fell as securities trading paused while ETF trading continued.
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.
How can you know if an ETF is managed actively?
An index fund or an ETF are both examples of passively managed funds. In addition, the summary overview of a fund will state whether it is an index fund or an exchange-traded fund (ETF). If it doesn’t, it’s safe to think it’s being actively managed. For example, Vanguard’s REIT ETF (VNQ) declares that it is an ETF and that it invests in REITs.
The goal is to closely replicate the MSCI US Investable Market Real Estate 25/50 Index’s performance.
There are some slight variations between ETFs and index funds when it comes to investing. The most significant difference is that ETFs trade on the stock exchange throughout the trading day, whereas index fund transactions, like other mutual funds, take place at the conclusion of the trading day. Many online brokers offer commission-free ETF trading for a variety of ETFs, and the expense ratios of index funds and ETFs offered by the same provider are quite comparable, if not identical. Some index funds have high minimum opening deposits, making their ETF equivalents more accessible.
Simply look through the company’s list of ETFs or index funds to see which are on the list to discover if your funds are actively or passively managed. Vanguard has the lowest management expense ratios (and why not go with the cheapest if you’re going with a passively managed fund that tracks an index?). Here are a couple of places to begin:
Unfortunately, actively managed funds still account for a big portion of invested assets (at the price of investor performance), but you now have the knowledge to help alter that!
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 significant overexposure to the low size factor of 1.17 and the value factor of 0.45, according to MSCI analytics. Momentum has a factor loading of 0.27, and quality has a factor loading of 0.19.
That technology weighting may be the key point of differentiation, as the performance of the two funds diverges by roughly 30 percentage points in favor of GSLC over the two years ended 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 far more exposure to the quality factor, with a quality score of 0.46 versus 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 higher 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.
Are active exchange-traded funds (ETFs) tax-efficient?
Actively managed ETFs are similar to actively managed mutual funds in that they are actively managed. Both are expected to have higher compositional turnover than their indexed counterparts, and fund managers play a significant role in deciding which holdings to invest in. However, there are a few important distinctions between them.
Actively Managed ETFs Trade Like Stocks
Active exchange-traded funds (ETFs) trade like stocks. Throughout the trading day, they can be bought and sold as often as needed. Mutual funds, on the other hand, only trade once a day, at the end of the trading day.
For investors who want to add some active management to their portfolios, this disparity may not be significant. Both types of actively managed funds have managers who react to market developments in real time, and investors purchase a fund to benefit from its longer-term investing strategy.
The stock-like tradability of actively managed ETFs is important for another reason: You’ll need to stick with active ETFs if you want to buy an actively managed fund in a margin account. You can’t buy mutual funds on margin in most situations.
Actively Managed ETFs Offer Better Tax Efficiency
The tax efficiency of an actively managed ETF is one of its largest benefits. ETFs have fewer taxable events than mutual funds since your money is used to purchase what are known as creation units rather than fund assets.
“Because mutual funds’ assets are purchased and sold, gains are distributed rapidly, according to Meadows. “You’ll have to pay capital gains taxes, which could be low or substantial, depending on how frequently the securities are exchanged in and out of the fund.”
When you sell your ETF shares, however, you only receive capital gains. For those who have active funds in retirement accounts such as 401(k) or Individual retirement accounts, this distinction may be less important (IRAs). Active ETFs, on the other hand, may offer tax advantages to investors who invest in taxable brokerage accounts.
Actively Managed ETFs Have Lower Investment Minimums
To buy mutual fund shares, you may need to meet a high investment minimum, depending on the broker. These minimums can be thousands of dollars, which can make it difficult to invest in a fund. Because ETFs have lower investment minimums than active funds, you may be able to get started investing in an active fund sooner or with a lower initial investment.
Mutual Funds Offer Less Transparency
Friedman claims that, despite the SEC’s new guidelines allowing for less openness in actively managed ETFs, mutual funds remain the least transparent investment vehicle.
“Actively managed ETFs must nonetheless reveal their tracking baskets more frequently, according to Friedman. “Mutual funds may only have to report their holdings once a quarter and are not required to reveal as much information.”
If fund transparency is important to you, actively managed ETFs may be preferable to actively managed mutual funds.