What are active ETFs?

Active ETFs are a type of exchange traded fund (ETF) that has a professional investment fund manager or team making decisions about the underlying investment portfolio allocation.

While actively managed funds often reference a benchmark index, the fund’s investment manager may deviate from the index with the objective of outperforming the benchmark, or ‘beating the market’.

As a result, the fund may produce investment returns that do not mirror the underlying index – unlike passively managed ETFs which typically aim to replicate a benchmark index.

How do active ETFs work?

Actively managed funds have a professional investment manager or team that makes investment decisions with the aim of either outperforming a specified benchmark or achieving a particular objective, for example, to manage investment risk.

These investment decisions relate to the timing of particular trades in the market to changing sector or asset allocations.

For example, Betashares Active Australian Hybrids Fund (managed fund) (ASX: HBRD) invests in a portfolio of hybrid securities actively managed by an investment manager.

If the hybrids market is assessed to be overvalued or to present a heightened risk of capital loss, the fund’s manager can allocate more of the portfolio to lower risk securities such as cash or bonds.

There are also actively managed emerging market funds available for investment, such as Betashares Martin Currie Emerging Markets Fund (managed fund) (ASX: EMMG) (an actively managed equity fund), which aims to outperform the MSCI Emerging Markets Index over rolling five-year periods by investing in a portfolio of carefully selected companies in fast-growing economies across the globe.

Can actively managed funds outperform the market?

The potential for actively managed funds to outperform the market (after fees are taken into account) comes down largely to the skill of the fund’s investment manager, and to the fees they charge.

One benefit of an active investment strategy is that the manager can make decisions to trade taking into account market conditions, without being bound by any benchmark index approach.

This can be advantageous during times of market volatility when allocations can be shifted away from any underperforming asset classes or sectors.

One disadvantage of an actively managed strategy is that active managers typically charge higher fees than passively managed funds.

Why invest in active ETFs?

  • Buying or selling active ETFs is as simple as buying or selling shares and can be done via an exchange such as the ASX
  • Active ETFs offer a simple way to access active investment management capabilities
  • Active ETFs are liquid investment products and can be traded throughout the trading day
  • Active ETFs have the potential to outperform a benchmark, also known as the potential to ‘generate alpha’
  • Active ETFs can seek to minimise losses during market downturns instead of passively aiming to track a benchmark
  • Actively managed ETFs generally don’t have minimum initial investment requirements (apart from any that may be required by a broker)

What are the disadvantages of active ETFs?

Investing in actively managed funds means it may be more difficult for an investor to anticipate the makeup of an investment portfolio in the future as the investment holdings are generally more prone to change compared to a passive ETF that seeks to track an index.

Despite having features in common with traditional passive ETFs, many actively managed ETFs have higher management fees to pay for the skill and experience of the fund manager. However, active ETFs typically charge lower fees than many unlisted actively managed funds.

Considerations before investing in active ETFs

  • Actively managed funds generally tend to charge higher fees than passively managed ETFs
  • Check the historical returns – though not necessarily a reliable indicator of future performance, it can be helpful to see how the fund has performed in the past
  • Be sure you understand the investment strategy the fund employs, and any benchmark it may be aiming to outperform

Betashares active ETF range