Many investors have noticed the growing role of active ETFs in the investing world. ETFs themselves have been around for decades, but it was the introduction of the so-called “ETF Rule” in 2019 to streamline the launch process that has helped the active ETF space bloom. With many investors moving from mutual funds to active ETFs, it’s worth revisiting the basics about active ETFs to understand their appeal.
See more: Market Sell-Off? This Active Equity ETF Is Still Outperforming
Firstly, it’s important to understand the differences between ETFs and mutual funds. ETFs trade on an exchange. Whereas most investors looking up a mutual fund online would find it on the issuer’s website, ETFs “live” on exchanges on top of their issuer’s sites. On the exchanges, not only do ETFs offer more transparency than mutual funds, they can also be traded, themselves.
While many investors buy and hold ETFs as core parts of their portfolios, some trade ETFs like standard securities. Their price information can in itself offer potent signals about the broader market. Many investors also like that they can take moment to moment looks at the holdings within an ETF.
What’s more, ETFs also provide some standout tax advantages relative to mutual funds. Thanks to their creation and redemption mechanism, ETFs don’t see as many taxable events as mutual funds do. That could make a big difference especially as tax issues loom after the election this year.
So where does the active side of things come in? An active ETF combines the advantages of an ETF with an active approach. Where some of the most iconic ETFs simply track an index, lacking flexibility, active ETFs can adjust. That could help as rate cuts arrive, particularly, and tech may either benefit or no longer have such a dominant lead in the market.
As more and more investors move to active ETFs, they can play a bigger role in portfolios. Whether on top of a core allocation, or as a fixed income offering, an active ETF could intrigue.
For more news, information, and analysis, visit our Active ETF Channel.
