Actively managed ETFs are booming as total assets under management, now over $600 billion, have nearly doubled in the last two years.
In this deep-dive article, we discuss the advantages and disadvantages of active ETFs, compare them to passively managed ETFs, explain what’s behind their recent growth, and we include a list of the top active ETFs as measured by AUM.
What Is an Actively Managed ETF?
An actively managed ETF is an exchange-traded fund that is managed by a portfolio manager or a team of managers who actively make investment decisions to try to outperform a specific benchmark or achieve a particular investment objective. This is in contrast to a passively managed ETF, which tracks a specific index and does not make any active trading decisions.
The largest active management ETF is the JPMorgan Equity Premium Income ETF (JEPI) with $32 billion in assets, as of April 19, 2024. The 10 top active ETFs include a balance of equity funds and fixed income fund.
Actively Managed ETFs vs. Passively Managed ETFs
There are multiple differences between actively managed ETFs and passively managed ETFs , including the management style or investment strategy, potential for returns, fees and manager risk.
Investment Strategy
Fees
Potential for Returns
Manager Risk
10 Top Active ETFs by AUM
|
Ticker |
Fund |
AUM |
Expense Ratio |
1-Yr Return |
|
JEPI |
JPMorgan Equity Premium Income ETF |
$32.4B |
0.35% |
9.03% |
|
DFAC |
Dimensional U.S. Core Equity 2 ETF |
$26.0B |
0.17% |
18.71% |
|
JPST |
JPMorgan Ultra-Short Income ETF |
$22.9B |
0.18% |
5.45% |
|
JEPQ |
JPMorgan Nasdaq Equity Premium Income ETF |
$11.7B |
0.35 |
24.45% |
|
MINT |
PIMCO Enhanced Short Maturity Active ETF |
$11.6B |
0.35% |
6.65% |
|
AVUV |
Avantis U.S. Small Cap Value ETF |
$10.5B |
0.25% |
20.42% |
|
DFUV |
Dimensional U.S. Marketwide Value ETF |
$10.2B |
0.21% |
16.44% |
|
DFAT |
Dimensional U.S. Targeted Value ETF |
$9.4B |
0.28% |
16.36% |
|
FBND |
Fidelity Total Bond ETF |
$8.8B |
0.36% |
0.86% |
|
DFUS |
Dimensional U.S. Equity ETF |
$8.6B |
0.09% |
21.49% |
Data as of April 19, 2024.
Advantages of Active ETFs
Active ETFs offer investors many advantages, including potential for outperformance, risk management, customization and tax efficiency. Here are details on the main advantages of active ETFs:
Potential for Outperformance
The primary goal of active management is to deliver returns that exceed the benchmark index. Skilled portfolio managers can use their expertise and analysis to capitalize on market opportunities and generate potentially higher returns. Eight of largest 10 active ETFs are outperforming their respective category peers, as measured by one-year returns through April 17, 2024.
Flexibility and Risk Management
Active ETF managers have the flexibility to adjust the portfolio composition and allocation based on changing market conditions, economic trends and their research insights. This can allow them to take advantage of short-term opportunities or avoid specific risks, such as those associated with a particular sector or country.
Knowledge and Expertise
Active management involves the knowledge and expertise of professional fund managers who conduct in-depth research and analysis to make informed investment decisions.
Customization
Active ETFs can implement specific investment strategies, such as value investing, growth investing, sector rotation or risk management, based on the fund's objectives and the manager's expertise.
Tax Efficiency
The ETF creation and redemption process can make actively managed ETFs more tax efficient than actively managed mutual funds. Active ETF managers may also employ tax loss harvesting strategies by selling losing securities to offset gains and reduce capital gains distributions, or they may hold certain tax-advantaged assets or use futures contracts or options, which can help manage taxes.
Disadvantages of Active ETFs
While ETFs have many advantages, such as potential for higher performance and customization, investors should also consider their disadvantages, such as higher costs and potential for underperformance. Here are details on the main disadvantages of active ETFs:
Higher Costs
Active management involves more research, analysis and trading activity, which can lead to higher expense ratios compared to passively managed ETFs.
Manager Risk
While the goal of active management is outperformance, not all active managers consistently beat their benchmarks. The risk of underperforming the benchmark exists, and poorly performing active ETFs may not justify their higher fees. For example, like investors, active managers are susceptible to behavioral biases that can impact investment decisions. Emotional reactions to market movements may lead to suboptimal choices.
Daily Disclosure Requirement
The daily disclosure requirement for ETFs it can make it more difficult for active managers to implement their investment strategies. If the manager's trades are known to the public, other market participants may be able to front-run them, which is the practice of buying or selling securities ahead of a public disclosure of information about those securities. Daily disclosure can also increase the costs of trading for active ETFs.
Time and Effort
Investing in active ETFs requires research and due diligence to evaluate the skill and track record of the fund managers. Investors need to actively monitor the fund's performance and management decisions.
The Booming Growth of Actively Managed ETFs
Active ETF assets under management have had impressive growth in recent years, growing from just under $50 billion at the end of 2017 to approximately $340 billion by December 2022. According etf.com data, active ETFs held more than $605 billion in assets by April 2023.
Here are some of the specific trends that are driving the growth of actively managed ETFs:
Bottom Line on Investing in Actively Managed ETFs
Active ETFs offer the potential for skilled management and the opportunity to outperform the market. However, they also typically come with higher costs compared to passive funds, as well as the risk of underperformance. As with any investment, it's important for investors to carefully consider their investment goals, risk tolerance and belief in the benefits of active management before deciding to invest in active ETFs.
Permalink | © Copyright 2024 etf.com. All rights reserved