Most investors are aware of the surge in popularity of ETFs, but fewer are aware of a new type of ETF: Active ETFs.
Active ETFs are actively managed funds that can be bought or sold on the stock exchange, and they deliver investors several compelling benefits.
Easy to buy and sell
Active ETFs, firstly, can be easily bought and sold at a live price during the day using a broker, just like a regular stock. Unlike managed funds, which generally require investors to fill in time-consuming forms, Active ETF units are easy to buy and sell. Active ETFs don’t have a minimum amount you must invest, allowing investors with smaller sized portfolios greater access to active management.
Simple portfolio management
An Active ETF is held in the same broker account as other portfolio holdings, like shares and ETFs. Portfolio tracking and record keeping, particularly around tax time, is simple and streamlined.
Low cost and greater pricing transparency
Many active ETFs charge lower fees than traditional actively managed funds and because they can be bought directly on the stock exchange, if an adviser is involved, investors can also avoid the additional charge of platform fees. As they are traded during the day, investors can monitor performance in real time. Traditional managed funds only provide valuations at the end of each day.
Most importantly, Active ETFs deliver the benefits of active management.
The opportunity for investors to access outperformance and earn better returns than an index or benchmark, which can significantly enhance portfolio performance.
The ability to buy value during market volatility.
Risk management through active avoidance of assets with excessive downside risks or low expected future returns.
ETFs, by contrast, are passively managed and investors must not only settle for an index or benchmark’s return less the fees they pay, but they are exposed to companies and assets no matter what their risk/return outlook.
Active management will allow investors to navigate an increasingly complex and volatile market environment as Central Banks around the world unwind years of Quantitative Easing (QE) and record low interest rates.
However, there are risks that need to be considered:
- Liquidity – although the units are quoted on the AQUA market of the ASX, there can be no assurance that there will be a liquid market for units, and no assurance that there will be a liquid market for the fund’s investments.
- ASX trading price – the trading price of units on the ASX may differ from the Net Asset Value (NAV) per unit and the indicative NAV (iNAV).
- ASX trading – in certain circumstances, the ASX may suspend trading of the units of the fund and in that event unitholders would not be able to buy or sell units of the fund on the ASX.
- Market making – as the responsible entity, intends to act as a market maker in the units on behalf of the fund, the fund will bear the cost and risk of these market making activities.
A neat package
Active ETFs are a powerful investment option because they combine all the benefits of ETFs and traditional managed funds – ease of use, diversification, and active management – in one easy-to-access investment that can be traded just like shares.
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.