While the exchange traded fund industry has become known for thematic active ETFs, some asset managers have brought broadly diversified equity products to market. According to Morningstar, these broadly diversified funds can be stickier and allow investors to benefit from their diversification.
“As the fund industry has grown, asset-management firms have rolled out more and more highly specialized funds. Theme-based sector funds, alternative funds of various stripes, leveraged factor portfolios, and single-country funds are just a few examples,” wrote Morningstar portfolio strategist Amy C. Arnott. “But investors have fared far better by keeping things simple and sticking with plain-vanilla, broadly diversified funds. More broadly defined offerings, such as U.S. equity and taxable-bond funds, have fared significantly better than narrower offerings, such as sector funds and alternatives."
Morningstar has found that in general, the broader the category, the better the results. The broadest categories, such as large blend, intermediate core bond, and foreign large blend, have performed better than the thematic funds with more tightly defined categories. This is in part because their large asset bases often cushion the impact of net flows in and out.
So, when constructing their portfolios, Arnott advises investors to focus on these broad “areas as core holdings and avoid narrowly defined funds that tend to have the widest return gaps.”
“The research confirms the adage that time in the market, rather than trying to time the market by rotating between narrowly constructed funds, is more constructive,” said Todd Rosenbluth, head of research at VettaFi. “While historically advisors could only access broadly diversified active strategies through mutual funds, they now have many more such ETFs to consider.”
With index funds unable to provide strong returns or protect against downside risk, active ETFs are “picking up steam with investors,” with more holding active ETFs in their portfolios now than did two years ago, according to Trackinsight’s Global ETF Survey 2022. Per Pensions & Investments, 37% of survey respondents plan to increase the share of active ETFs in their portfolios by at least 5% this year, up from 25% who said the same in 2020.
T. Rowe Price offers a suite of actively managed ETFs. T. Rowe Price has been in the investing business for over 80 years through conducting field research firsthand with companies, utilizing risk management, and employing a bevy of experienced portfolio managers carrying an average of 22 years of experience.
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