Most investors are aware of the surge in popularity of exchange traded funds (ETFs) but fewer are aware of a new type of ETF: Active ETFs.
Active ETFs are like an actively managed fund that can be bought or sold on the stock exchange. Active ETFs deliver investors a number of 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.
Simple portfolio management
Managed funds can be scattered around a number of fund managers, complicating record keeping. But 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 simplified and streamlined.
Active management
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.