Active ETFs are on the rise. More than 30 years since the arrival of the first ETF in the U.S., active ETFs are now having their moment. Historically, ETFs have been synonymous with passive in strategies like the SPDR S&P 500 ETF Trust (SPY ). That said, active strategies are now staking their claim following a strong year and change of flows and AUM growth. So, how do active funds build on the passive tradition in the ETF space?
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ETFs of all varieties offer improved tax benefits relative to their mutual fund cousins. Mutual funds tend to produce many more taxable events than ETFs thanks to ETFs’ use of their “creation/redemption” share mechanism. ETFs also offer transparency and relatively easier tradability compared to mutual funds.
Active ETFs, however, build on the benefits offered by their passive siblings. According to American Century Investments, active ETFs offer greater flexibility compared to passive ETFs. Whether seeking out greater opportunities or avoiding potential risks, active funds can add value where index strategies can’t.
In 2023, 21% of total ETF flows went into active strategies despite active funds only managing 6% of assets. What’s more, this year through May, active ETFs accounted for almost one-third of flows.
Active ETFs offer investors exposure to high-quality managers who can leverage strong research capabilities. Actively managed ETFs can also offer important diversification amid the concentration risk looming over the markets. Combining active and passive ETF benefits, then, could make for an appealing approach.
That’s where a strategy like the Avantis U.S. Equity ETF (AVUS ) comes in. Charging 15 basis points (bps), AVUS includes an actively managed basket of all-cap U.S. stocks. Measured against the Russell 3000, it aims to offer a lower-cost active equity strategy to play a core role in portfolios. For those investors looking to get more active ETF exposure, AVUS may appeal.
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