Exchange-traded funds (ETFs) have become increasingly popular in recent years, as they allow investors to hold a range of assets in a single trade.
But what other benefits do ETFs offer investors? And what is the difference between ETFs that are actively managed and those that track the index?
What is an ETF?
Exchange-traded funds (ETFs) are investment vehicles that can be bought and sold on the stock exchange. They are often referred to as a basket of securities, as they are made up of multiple underlying assets, like managed funds. However, they are listed and traded on exchanges such as the Cboe and the ASX.
ETFs are becoming increasingly popular, as they allow investors to hold a range of assets such as bonds, shares, or commodities in a single trade. And, in the same way a stock is traded on an exchange, an ETF is similarly traded, so its price adjusts accordingly at regular intervals throughout the day.
What is the difference between a passive ETF and an active ETF?
Of the hundreds of ETFs available in Australia today, there are those that are actively managed and those that track the index. A ‘passive’ ETF is a vehicle designed to track a particular index. It mirrors the holdings of an index and is updated regularly to reflect any changes. Passive ETFs have been around a long time and were designed to provide investors with a cost-effective single security that would track an index.
An active ETF does not aim to track an index. Instead, an active ETF is made up of a portfolio of securities actively managed by an investment team. As they are bought and sold on an exchange, active ETFs are designed to provide investors with access to the investment expertise of fund managers without having to invest in a managed fund.
What are the benefits of an active ETF?
Buying or selling an active ETF can be done through an exchange such as Cboe, and it can be an efficient way to gain ownership of a portfolio of shares in the same way as buying an individual share.
- Active ETFs give investors access to actively managed funds that have the potential to outperform a specific benchmark.
- Compared with traditional managed funds, active ETFs give investors higher intraday transparency, pricing, and liquidity. With live pricing, investors can choose at which price they would like to invest.
- An active ETF is a diversified portfolio, and it can be held through a broker or platform provider, making tax reporting and portfolio administration easier for individual investors or self-managed super funds.
- Active ETFs are professionally managed, which means they may be designed for equity investors seeking lower volatility and reduced downside risk in falling equity markets, with the potential for long-term capital growth and some income.
Active ETF vs. Managed Fund
Both active ETFs and managed funds are popular investment vehicles available to Australian investors. There are similarities between the two structures, but there are also many differences.
