Buoyed by a spate of mutual-fund-to-ETF conversions, active ETFs made their presence felt in 2024. That accounted for significant percentages of both inflows and launches.
Alone, increased adoption of active ETFs by advisors and retail investors could benefit upstart products such as the ALPS/SMITH Core Plus Bond ETF (SMTH ), the ALPS Active Equity Opportunity ETF (RFFC ), the ALPS Active REIT ETF (REIT ) and the ALPS Intermediate Municipal Bond ETF (MNBD ). But there’s more to the story. Gone are the days that active and passive were pitted against each other.
Increasingly, advisors view actively managed ETFs as complements to passive-heavy client portfolios. That means funds such as the aforementioned ALPS products can serve the benefits of adding diversification. Simultaneously, they retain the transparency and tax perks clients have come to know and love with passive ETFs.
Active ETFs on the Rise
Arguably, it’s the ETF wrapper — not active management — that’s supporting active ETFs’ ascent. Translation: many investors like active managers, but they love the ETF structure.
“This combination of attributes can make active ETFs a valuable addition to an investment portfolio,” noted Goldman Sachs Asset Management (GSAM). “They offer investors an efficient, flexible way to gain exposure to equity and fixed income [markets. That includes] corners of these markets where structural inefficiencies make specialist research and rigorous bottom-up security selection essential, in our view. Innovative products such as derivative-income and buffer ETFs can allow investors to manage volatility while generating income.”
Actively managed ETFs can complement existing passive exposures. That means advisors and investors don’t have to make “hold” or “sell” decisions to make room for active products.
“Active ETFs can provide an efficient complement to existing allocations that allows investors to diversify their portfolios,” added GSAM. “The solutions they offer may help investors who are seeking to manage market volatility and also outperform the market. Active security selection can allow investors to avoid the concentration issues facing many passive investment products that track indices whose performance is driven by a small percentage of stocks.”
Not to be understated is the versatility offered by actively managed ETFs. For example, SMTH can be more responsive to interest rate changes than passive rivals. And REIT can more readily capitalize on emerging trends in the real estate sector.
“Active ETFs could also be a versatile component of a model portfolio, which provides a framework for pursuing an investor’s objectives as they evolve over time,” concluded GSAM. “As part of a diversified asset allocation that balances risk and return, active ETFs may also be used to expand an investor’s investment options. For example, derivative-income ETFs provide the potential to generate income from equity markets that is independent of the interest-rate movements that impact yield in fixed income.”
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