From purely passive to transparent active, investors now have a variety of ETFs to choose from.
Historically, ETFs were synonymous with passive investing. Smart beta strategies took this up a notch, offering unique methodologies and index construction. Now, as the 2020s have revealed a new, complex economic regime, active ETFs have seen dramatic growth and acceptance among investors
Active ETFs saw record flows during the first half of 2024, bringing in over $120 billion in net flows during the first two quarters. To compare, active ETFs never exceeded $10 billion in net annual inflows for the first ten years they were available to investors.
See more: Investing in Uncertainty: GQI Combines Income and Quality
Active funds can potentially enhance returns and mitigate risk, as managers can make opportunistic security selection decisions, according to Tyler Williams, vice president of ETF capital markets and products for Natixis Investment Managers.
According to Williams, actively managed ETFs are characterized by real-time security selection decision-making regarding the securities selected and the security’s portfolio weightings.
It’s important to note that active ETFs aim to outperform an index, but their portfolio composition may be entirely different from that of the index.
See more: Active Value ETF VNSE Outperforms Category Averages Over 3 Years
Actively managed ETFs have the potential to outperform passive ETFs and enhance returns due to their ability to capture opportunities that passive ETFs can’t. According to Williams, this includes the ability to trade—rebalance, add, or remove individual securities—when they believe the time is right rather than on a predetermined basis decided by an index provider.
According to Williams, this characteristic can be particularly useful in volatile markets. During periods of volatility, the portfolio manager can leverage in-house research to uncover compelling opportunities resulting in short- or long-term outperformance.
Active ETFs
The Natixis Loomis Sayles Short Duration Income ETF (LSST ), the Natixis Gateway Quality Income ETF (GQI ), and the Natixis Vaughan Nelson Select ETF (VNSE ) are three examples of transparent active ETFs.
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