Are ETFs Actively Managed or Passive?

ETFs can be either actively managed or passive, but most are actually passive. This is because passive ETFs track a specific index, like the S&P 500.

Passive ETFs have lower fees, which can be a significant advantage for investors. They also tend to be more tax-efficient.

Actively managed ETFs, on the other hand, have professional fund managers who try to beat the market by making trades and adjustments. However, their fees are often higher and their performance can be unpredictable.

Most investors choose passive ETFs because of their simplicity and cost-effectiveness.

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The global ETF landscape is vast and ever-evolving. Traditional, passively managed ETFs still vastly outnumber actively managed ETFs, with approximately 500 actively traded ETFs in the U.S. accounting for about 20% of all ETFs.

In contrast, actively managed ETFs have been growing in popularity, with assets under management (AUM) increasing by 55% over the previous year by year-end 2023. This growth has been driven by investor interest in the active ETF category, with 73% of all new ETFs launched in 2023 being actively managed.

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Active ETFs now constitute only $530 billion of the $9.6 trillion ETF space, but their presence is growing, with 22 AMETFs listed on the Johannesburg Stock Exchange (JSE) as of October 2024. This is a significant step in South Africa's ETF market, reflecting a broader global trend towards more dynamic, accessible, and cost-effective investment vehicles.

The growth of actively managed ETFs has even inspired some passive ETFs to include the word "active" in product descriptions and names, despite not accurately reflecting the strategy of the ETF itself. Investors are thus cautioned to remain vigilant in their research before investing in a product.

South Africa's collective investment schemes reported R3.64 trillion in assets under management across 1,852 portfolios as of the second quarter of 2024.

The majority of these assets were in actively managed funds. The total market capitalization of ETFs listed on the JSE, including AMETFs, stood at over R180 billion as of October 2024.

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This is a fraction of the total CIS AUM, but with 22 AMETFs now listed, their presence in the market is growing. There's still room for expansion.

Here's a brief overview of the South African ETF landscape:

The introduction of AMETFs on the JSE has the potential to reshape the landscape of investment in South Africa, making these products well worth the attention they're receiving.

The largest active ETFs as of December 2019 were dominated by ultra-short bond funds. The PIMCO Enhanced Short Maturity Active ETF, with $13.7 billion in assets, was the largest of these funds.

The top 10 active ETFs had a combined $56 billion in assets, a significant amount but dwarfed by the $2 trillion held by the top 10 passive ETFs at the end of 2019.

Here are the 10 largest active ETFs as of December 2019:

Active ETFs have lower expense ratios than their comparable mutual fund equivalents, making them a more cost-effective option.

One such example is the ARK Innovation ETF (ARKK), which surged 71% in 2023 and has a lower expense ratio, making it a cheaper option for investors.

Active ETFs can also see exponential growth, particularly those that focus on a specific sector or trend, as seen with ARKK's focus on "disruptive innovation".

During times of high market volatility, active strategies may do better than passive strategies, as seen with ARKK's performance during the pandemic crisis of 2020.

However, research still suggests that passive strategies are more effective than active ones over a long period of time.

Active ETFs offer several benefits over mutual funds, including lower costs, tax-efficiency, the ability to buy and sell during market hours, and additional trading flexibility.

On a similar theme: Passive Etfs

Investing in ETFs offers several benefits, including tax efficiency and liquidity. This is especially true for investors who frequently trade, as ETFs provide intraday trading capabilities.

Active ETFs are designed to mimic an actively managed strategy, aiming to provide above-average returns. However, they still account for only about 20% of all ETFs in the US.

Investors should remain vigilant in their research before investing in an ETF, as some passive ETFs may include the word "active" in their product descriptions and names, even if that term doesn't accurately reflect the strategy.

Here are the six key dimensions to compare Passively Managed ETFs and Actively Managed Mutual Funds:

ETFs offer transparency of holdings, ease of trading, and generally lower fees compared to actively managed mutual funds.

There are approximately 500 actively traded ETFs in the U.S., which account for about 20% of all ETFs.

These actively managed ETFs constitute only $530 billion of the $9.6 trillion ETF space, but they're growing rapidly.

By year-end 2023, the assets under management (AUM) for active ETFs increased by 55% over the previous year.

As of 2023, about 73% of all new ETFs launched were actively managed, and over 75% of firms had positive cash flow.

There are even some passive ETFs that have started including the word "active" in their product descriptions and names, so investors need to be careful with their research.

Active, non-transparent ETFs (referred to as "ANTs") are a type of actively managed ETF that don't disclose their portfolio holdings daily.

At the end of 2023, there were 1,255 actively managed ETFs, according to research by Morgan Stanley, combined they manage around $444 billion in assets.

This growth in actively managed ETFs has occurred over several asset classes, including domestic and international fixed income, international equity, and commodities.

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One of the biggest advantages of Active ETFs is that they have no minimum investment amounts, allowing you to invest any amount you like as long as you can purchase a single share of the fund on the market.

This is in contrast to active mutual funds, which often have minimum investment amounts ranging from $1,000 to $5,000 for retail funds.

Active mutual funds can also charge sales loads, which can range from 1% to 5% of your investment, reducing the amount of money that actually gets invested.

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But with Active ETFs, you don't have to worry about sales loads or minimum investment amounts, making it easier to get started with your investment portfolio.

The elimination of commission charges by major discount brokerages like Charles Schwab in 2019 has also made it more convenient to invest in Active ETFs.

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Investing in ETFs offers a unique advantage when it comes to buying and selling shares during market hours.

You can buy and sell shares in active ETFs during the trading day while the stock exchange is open.

This is a significant benefit for frequent traders who want to take advantage of market fluctuations throughout the day.

Unlike actively managed mutual funds, which are generally priced only once each day after the market close, active ETFs allow for intraday trading.

This means that investors can make trades focused on the ETF, rather than the mutual fund itself, making it a more cost-effective option.

As a result, the mutual fund is less likely to experience cash flow in and out, making it easier to manage and maintain.

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Until 2019, the Securities and Exchange Commission (SEC) treated actively managed ETFs like passive ETFs, limiting active ETF product development to strategies least affected by daily transparency requirements.

Active fund managers were able to disclose holdings less frequently to protect their intellectual capital and prevent unscrupulous trading activity.

Portfolio transparency in actively managed funds has been a topic of discussion for a while. Most mutual funds in the US report their holdings to shareholders only on a quarterly basis, making it difficult for investors to know what their fund is holding between reporting periods.

This lack of transparency can lead to investors being unaware of the fund's true holdings, making style drift harder to detect. For instance, portfolio managers could make more aggressive investments in an effort to generate return and take on more risk than investors would expect based on the fund’s investment mandate.

The Securities and Exchange Commission (SEC) has historically treated actively managed ETFs in the US the same as other ETFs, requiring daily disclosure of all holdings as of the last business day on their website. This extensive disclosure ensures the accountability of the portfolio managers to a much higher degree than in active mutual funds.

However, the SEC announced in November 2019 its intention to approve new ETF structures allowing actively-managed ETFs to not publish their holdings each day. These new types of ETFs are commonly referred to as semi-transparent ETFs or non-transparent ETFs.

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Intraday pricing and liquidity can be a challenge with mutual funds. You can only buy or sell a mutual fund at 4pm ET, and the price is not known until after the fact.

This can be frustrating for investors, but one advantage is that the shares are transacted at the fund's net asset value (NAV). The NAV is the fund's true value, but it's only released at market close.

Actively-managed ETFs, on the other hand, are exchange-traded, like stocks. This means you can see the indicative value of an Active ETF at any point in the day.

The indicative value is not the NAV, but it's a good estimate. The market maker or designated broker has an incentive to keep the deviation between the share price and the NAV to a minimum.

Investors can get in and out of an Active ETF at any point during market hours, and they can see the rough price of the fund at any point. This is a big advantage over mutual funds.

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