Unlike passive ETFs which aim to track the risk/return profile of their underlying index (S&P 500, EuroStoxx 50, Nikkei 225, etc.) as close as possible, an actively managed ETF is a type of exchange-traded fund in which a portfolio manager or a team of managers make active decisions about the allocations of the fund with the goal of outperforming a benchmark or achieving a specific investment objective. This means the manager of an active ETF uses his/her expertise to select the securities of the portfolio, adjust the portfolio, or react to a changing market environment.
Passive ETFs are known for their high transparency—they publish their holdings daily to the public. Some actively managed ETFs are reluctant to provide the same level of transparency to avoid revealing their strategies to competitors. While this might be of less concern for investors, the lack of transparency may cause wider spreads on exchange, which make the trading of none or semi-transparent active ETFs more expensive.
As the selection of the single securities by active managers is driven by, in some cases, quite extensive quantitative (fundamental) and qualitative research efforts, it is normal that actively managed ETFs charge on average higher management fees than their passive peers. That said, the fees and expenses charged by active ETFs are in most cases much lower than for respective actively managed mutual funds.
With regard to the above, the main difference between a passive and an actively managed ETF is the aim to outperform the market (benchmark) or meet specific investment objectives by selecting securities based on the discretion of the portfolio manager. Nevertheless, like for active managed mutual funds, the success of the strategy depends on the skills and capabilities of the portfolio manager, which means not all active strategies may outperform their benchmarks or achieve their goals/objectives, especially after fees and expenses.
This article is for information purposes only and does not constitute any investment advice.
The views expressed are the views of the author, not necessarily those of LSEG Lipper or LSEG.
