Sign up to receive updates on investing in funds and stay informed with our myFT Daily Digest email, providing you with the latest news in the world of investing every morning. Life is not binary, and this applies to the ongoing battle between passive and active funds. While most passive funds are in the form of exchange-traded funds (ETFs), there is now a rising trend of active ETFs. This might seem contradictory to the concept of passive funds, which aim to replicate a benchmark index, but active ETFs take a different approach. They do follow a benchmark but aim to outperform it by making adjustments to stock or bond selections, and they disclose their portfolio and returns daily. At first glance, one might wonder how this differs from active listed funds or investment trusts. The distinction lies in their structure and liquidity. Active ETFs, like investment trusts, are traded on exchanges, but they are open-ended and have carefully managed liquidity. This means that discounts or premiums should be marginal, unlike investment trusts which often experience significant discounts. Additionally, active ETFs tend to have lower fees compared to investment trusts. With their lower fees, lack of discounts, and ease of trading on exchanges, it’s no wonder why many investors are drawn to active ETFs.
One downside for investment trust enthusiasts is that very few new trusts have been launched in the past 18 months, compared to the numerous passive and active ETFs. This has negatively impacted the returns of investment trusts, as discounts on their net asset values have become increasingly common. The US market has already seen a surge in active ETFs, and it’s likely that more will be introduced elsewhere. Major fund management groups are embracing the idea, with JPMorgan and Dimensional switching some of their mutual funds to active ETFs. Active ETFs have already made their way to Europe, although their presence is relatively low-key. However, institutional investors are showing interest, with a survey revealing that 32% of European investors plan to increase their allocation to active ETFs this year.
Most active ETFs focus on ESG investing and fixed income or bonds. Active bond ETFs make up the largest share, with 47% of active Ucits ETF assets in Europe aligning with fixed income strategies. Given the growing interest in fixed income among retail investors, major fund managers are exploring opportunities in this space. For example, Axa IM, which previously steered clear of ETFs, has launched a corporate bond tracker with an ESG tilt. Bond giant Pimco also runs a popular active ETF in Europe. These active ETFs offer advantages in navigating the complexities of the fixed income market, providing value through active management and lower costs.
Active ETFs have also gained popularity in the ESG-infused equity tracker space. JPMorgan, for instance, has launched a range of ESG-focused funds, and other players are entering the market as well. A survey indicated that nearly 70% of ETF buyers use active ETFs for ESG investing, either purely active or in combination with passive strategies. This highlights the importance of having a manager who can effectively analyze ESG metrics to avoid poor investment decisions.
It’s worth noting a few considerations when it comes to active ETFs. As with any active strategy, there is a risk of underperformance. Additionally, active ETFs are limited to listed securities, which means they miss out on exposure to unlisted assets that other structures can offer. Investment trusts, on the other hand, can provide that exposure but often come with discounts.
In conclusion, as the drought in new investment trust IPOs continues, it’s likely that more fund managers will turn to launching active equity ETFs instead. It’s only a matter of time before someone introduces an active tech equities ETF that can rival popular investment trusts like Scottish Mortgage or Polar Capital Technology.
David Stevenson is an active private investor who shares his insights through email ([email protected]) and Twitter (@advinvestor). He holds shares in Scottish Mortgage Investment Trust.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
