Issue link: https://resources.envestnet.com/i/1527501
FOR HOME OFFICE AND ADVISOR USE ONLY – NOT FOR USE WITH THE INVESTING PUBLIC. © 2024 Envestnet | PMC. All rights reserved. When most people think of Exchange-Traded Funds (ETFs), their minds turn to passively managed products. The growth of active ETFs is changing the landscape, though. In the U.S., many individual investors use mutual funds to access actively managed investment strategies designed to (potentially) outperform benchmarks. High net worth investors may also use separately accounts (SMAs) and hedge funds to tap the skills of talented portfolio managers. ETFs, meanwhile, have historically tracked passively managed indices (traditional beta) or, more recently, followed smart beta strategies. (Smart beta products utilize quantitative methods in an attempt to isolate stocks or other securities with certain characteristics–these characteristics are often termed "factors." Common factors include Value, Momentum, Quality, Size, and Carry.) More recently, actively managed ETFs have been gaining popularity, so let's explore this innovative category of fund. Active ETFs Explained Active ETFs are managed by investment teams seeking to outperform their benchmarks, just like active mutual funds. The only difference is the "wrapper" used to enable investor access to the managed portfolio underlying the fund. In fact, the same investment strategy can often be offered as either a mutual fund or ETF. As we discussed in our ETF 101 article, the ETF structure offers features that may benefit investors, including potential tax savings and greater trading flexibility. Some actively managed mutual funds are even being converted into ETFs to offer investors a fresh way to access an experienced fund management team. Because active ETFs generally require significant research processes, expensive data feeds, and specialized analysts/portfolio managers, they typically charge greater fees than index funds. (Fees vary widely across the active ETF universe, though.) So, the possibility of a fund outperforming its benchmark generally comes at the price of a higher expense ratio. As always, we encourage investors and their advisors to know what they're paying for when selecting any type of fund. Active ETFs Are Gathering AUM Now that we've discussed the fundamentals of active ETFs, you may be wondering, "Just how popular are these products?" Great question! At the end of 2022, active ETF AUM (assets under management) totaled almost $341 billion. 1 Still, that figure is equivalent to just under 5.6% of the $6.1 trillion invested in traditional passive ETFs. 2 An examination of growth rates, however, illustrates the burgeoning demand for active ETFs. 1 Data from Morningstar Direct 2 Data from Morningstar Direct, excludes leveraged and inverse ETFs FREQUENTLY ASKED QUESTIONS Active ETFs Are Gathering Steam. What Are They, Anyway?