The Advantages to Investing in Active ETFs

Actively managed exchange traded funds are enjoying some go-go days this year. At the end of the first quarter, active ETFs held a record $329 billion in combined assets under management.

That’s a scant percentage of overall ETF assets under management. As Morningstar’s Ben Johnson points out, active ETFs represent just 3.5% of overall industry assets. That implies plenty of room for growth, and many active ETFs have the tools to do so. Fees, not surprisingly, are a solid starting point.

“The biggest benefit of ETFs is that–all else equal–they tend to have lower fees than mutual funds. Most ETFs’ fees are stripped down to the cost of manufacturing the portfolio (the management fee),” says Johnson. “Other line-item expenses that investors incur in mutual funds–those that go toward paying for advice, marketing, distribution, and shareholder recordkeeping–are typically either absent from their bill or are much lower when they pay to invest in an ETF.”

Active managers are well aware of this, and many that are engaged in the ETF industry either offer inexpensive products or funds that undercut traditional active mutual funds on costs.

More Active Perks

It’s not just low expense ratios that lure advisors and investors to ETFs. Tax implications are significant part of the equation too.

Seasoned advisors and investors know that when actively managed mutual funds liquidate or trim a position at a profit, it’s the fund’s shareholders that are on the hook for capital gains taxes. That eats away at returns over time. Conversely, the creation and redemption process pioneered in the ETF industry makes ETFs more tax efficient and reduces investors’ exposure to capital gains levies.

“ETFs’ single biggest advantage over mutual funds is tax efficiency,” adds Johnson. “The way that money typically comes and goes from mutual fund and ETF portfolios is different, as is the way that their portfolio managers initiate and close positions. These differences are the source of ETFs’ tax advantage over mutual funds.”

Another reason why end users and issuers alike may be gravitating to active ETFs is accessibility. Not all active mutual funds are available through all trading platforms and some of the ones that are come with pesky if not hefty minimum investments.

On the other hand, many popular brokers allow retail investors to purchases shares in close to if not all U.S.-listed ETFs, and ETFs never carry mandatory minimums. Plus, most of the big-name brokers – Fidelity, Schwab, and the like — no longer charge commissions on ETFs.

For more news, information, and strategy, visit the Active ETF Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.