Market volatility is more than just a bumpy ride; it can derail portfolios. For those at or near retirement, or looking to pay for college for a child, market volatility can throw real challenges at well-laid plans. Right now, market volatility may be on the rise, as key stocks have seen painful losses and the broader economy faces real headwinds. Active ETFs can help portfolios become more durable in uncertain times in three key ways.
Active Adaptability
Many investors understand the premise of active management, but what does it really entail? It can help to consider bond strategies, for example. A passive bond ETF must track its index, attempting to replicate its index’s holdings as closely as possible for investors. Those funds can often fail at a basic level if bonds in the ETF default or are called too early because passive managers cannot adapt as quickly to replace them as active managers can. Active management’s adaptability can also benefit equity strategies if major events throw a wrench in a strategy’s plans.
Fundamental Focus for Market Volatility
Active ETFs’ focus on fundamentals can also help in volatility. Where passive funds often track market cap-weighted indexes, eschewing fundamentals, active ETFs lean heavily on those metrics. Cash flow, for example, can help investors identify companies able to withstand tough times or bumpy rides in markets. At the same time, that focus can also help active ETFs find companies poised for greater profitability.
Unlocking the ETF’s Power
ETFs themselves can help portfolios facing rising market volatility. They offer much greater transparency and tradability compared to mutual funds, but perhaps their greatest benefit is their tax efficiency. Add active to the mixer, and investors get funds that can use active flexibility to pursue performance and limit tax impacts, all in a transparent and tradeable wrapper.
Active ETFs often charge competitive fees compared to passive peers. With many investors considering tax loss harvesting, as well, the time could be now to add market volatility-resistant active ETFs.
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