Understanding Active ETFs
Active ETFs are an integral component of today's investment landscape, offering active investment management combined with convenient access. In this overview, we aim to demystify 'what are Active ETFs', detailing what they are, how they function, and their advantages for investors.
What are Active ETFs?
Active Exchange Traded Funds (ETFs) are investment funds traded on the stock exchange, like regular shares. Unlike passive ETFs, which aim to replicate the performance of an index, Active ETFs involve a professional manager making decisions about how to allocate assets within the fund, based on research, forecasts, and their expertise. This active management aims to outperform the market or achieve specific investment objectives. Active ETFs offer transparency and liquidity, as they can be bought and sold at market price whenever the exchange is open.
How do Active ETFs work?
Active ETFs are managed by professional investment managers who actively manage the fund’s portfolio. These managers utilise research, analysis, and their judgement to select assets with the aim of achieving better returns than a benchmark index. Investors can buy and sell shares of Active ETFs on the stock exchange during trading hours. Through the use of a specialist market maker, appointed by the ETF issuer, a market is created which allows investors to trade ETFs on an exchange at a price that fluctuates throughout the trading day based on supply and demand in the market, as well as the performance of the underlying assets.
What are the different types of Active ETFs?
Active ETFs can be categorised by their investment strategies and asset classes. They might invest in equities, bonds, commodities, or a mix of asset types to provide a total portfolio solution such as Schroders GROW ETF. Some focus on specific sectors or geographic regions, while others apply thematic strategies, such as sustainable investing. As with unlisted managed funds, Active ETFs can employ different investment styles, characteristics and risks. This diversity allows investors to choose Active ETFs that align with their investment goals and risk tolerance.
What are the benefits of investing in Active ETFs?
Investing in Active ETFs gives you exposure to professional investment management where their focus is on beating the index or meeting a specific investment objective. ETFs in general offer transparency, with the ability to view the underlying holdings regularly, and offer ease of transaction as they can be easily traded on stock exchanges. This flexibility can be attractive to investors looking to adapt their portfolio quickly. Additionally, Active ETFs typically have lower minimum investment requirements than managed funds, making them accessible to individual investors for as little as $500 initial investment.
How are Active ETFs different from unlisted managed funds?
Active ETFs differ from unlisted managed funds primarily in their tradability. Active ETFs can be bought and sold on stock exchanges just like shares, providing liquidity throughout the trading day. In contrast, unlisted managed funds are only traded at the end of the trading day at the fund’s net asset value.
How do Active ETFs differ from passive ETFs?
Active ETFs employ a team of investment professionals who make decisions to outperform a benchmark, whereas passive ETFs aim to replicate the performance of an index. This means that active management can respond to market conditions and opportunities, whereas passive ETFs remain tied to the index’s composition. Consequently, Active ETFs may offer the potential for higher returns due to strategic decision-making but may also incur higher fees due to active management.
What role do Active ETFs play in an investment portfolio?
Active ETFs can play a versatile role in a diversified investment portfolio. They provide opportunities for active management and the potential for higher returns compared to passive investments. Investors can use Active ETFs to target specific sectors, investment styles, or asset classes, complementing a broader portfolio strategy. They provide flexibility and liquidity, enabling investors to swiftly adjust their investments in response to market changes. This adaptability makes them a valuable component of modern portfolios.
Are Active ETFs suitable for SMSFs?
Active ETFs may be suitable for Self-Managed Super Funds (SMSFs) as they offer diversification, liquidity, transparency, and professional management, aligning with SMSF principles of control and diversification. They can provide SMSFs with exposure to a range of asset classes and investment strategies, fitting various risk profiles and objectives. However, SMSF trustees should carefully assess the specific Active ETFs to ensure they fit their investment strategy and comply with superannuation regulations.
What are the risks of investing in Active ETFs?
All investments carry a degree of risk, and investing in Active ETFs carries some risks that investors need to be aware of. These can include market risk, manager risk, and liquidity risk. Market risk arises from the inherent volatility in financial markets, which can affect the value of the investments within the ETF. Manager risk involves the dependence on the investment manager’s skill and decisions, which may not always lead to favourable outcomes. Additionally, while generally liquid, changes in market conditions can affect the liquidity of Active ETFs.
What fees apply to an Active ETF?
Active ETFs typically charge a management fee, calculated as a percentage of the fund’s assets, paid to the fund manager for their services. Some Active ETFs may also include performance fees, where the manager takes a percentage of the profits above a specified benchmark. While generally higher than passive ETFs due to active management, these fees can vary widely among funds. Investors should review and compare the fee structures of different Active ETFs carefully and consider any returns on an after fees basis.
Should I invest in an Active ETF?
Whether to invest in an Active ETF or any other type of investment depends on your investment goals, risk tolerance, and portfolio strategy. Active ETFs offer potential for outperformance through active management, which can add value in certain market conditions. However, higher fees and manager risk are considerations. Assessing your financial objectives and consulting with a financial adviser can help determine if Active ETFs align with your investment approach and whether they fit within your broader portfolio.
How to choose the best Active ETF
Choosing the right Active ETF requires you to assess your financial goals and objectives as a starting point as these are unique to you and your personal situation. When evaluating your investment choices you will need to consider the fund’s investment objective, strategy, past performance, and investment managers skills and experience and how these factors align with your personal financial goals and objectives. Consider the level of risk associated with the ETF, along with its fee structure and you should refer to the products Target Market Determination available on the website for a summary of the product suitability as defined by the product issuer. Consulting financial analysts and advisers can provide further insights.
How to invest in Active ETFs
Investing in Active ETFs is similar to buying shares on the stock market. You can purchase them through a brokerage account, either online or through a financial adviser. Research the specific Active ETF you are interested in, using the fund’s prospectus and other available resources including the Target Market Determination. Determine the amount you wish to invest and execute the trade during market hours, just like any other stock trade. Ensure you understand the fees and terms associated with your investment.
How do I track performance of my Active ETF?
Important information on the ETFs are available on the exchange that they are listed (ASX or Cboe) and you can search for that information using the ETF ticker or Code. To track the performance of your Active ETF, review regular fund updates and reports provided by the issuer, which often include detailed analysis of holdings and performance metrics. Many issuers offer online access to performance data, often updated daily. Stay informed about market trends and any changes to the fund’s strategy to best understand potential impacts. Any important updates relating to the ETF will be available on the respective exchange through a market announcement.
What are the tax implications of investing in an Active ETF?
Active ETFs in Australia are subject to capital gains tax and income tax on distributions received. When you sell shares of an Active ETF for a profit, you may incur capital gains tax, depending on the length of time held and your tax position. Distributions from the ETF, which may include dividends or interest, are typically taxed as income. Taxation can be complex, so consulting with a tax professional is recommended to understand the specific implications for your situation.
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