Methods to know if actively managed ETFs are proper on your portfolio


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Exchange traded funds are often associated with passive strategies. But money has also flowed into the actively managed version of ETFs, as investors long for more precision, say experts.

While passively managed ETFs aim to track an index like the S&P 500, active managers are more hands-on and try to outperform a specific benchmark.

Active ETF managers can routinely “look under the hood” using a process-based approach, said certified financial planner Jon Ulin, executive director of Ulin & Co. Wealth Management in Boca Raton, Florida.

Actively managed U.S. ETFs surged to net worth nearly $ 275 billion in September, from $ 140 billion last year, according to Morningstar data, which represents just over 4% of the total U.S. ETF market.

Experts say there are several reasons for the explosive growth.

“I think the common denominator between a lot of different things is that ETFs are becoming the vehicle of choice for a larger number of investors,” said Ben Johnson, director of global ETF research at Morningstar.

Lower costs

One of the biggest selling points of ETFs over mutual funds is cost, and active ETFs are no exception.

Typically, ETFs are less expensive than mutual funds, averaging 0.62% of fees, according to Morningstar, compared to 0.71% for an active equity fund, reports the Investment Company Institute.

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“In the past year, we switched a large part of our portfolio holdings in the customer model from mutual funds to ETFs in order to lower investment costs and lower taxes on accounts without retirement plans,” said Ulin.

Of course, the fees for active ETFs can be higher than equally weighted passive ETFs, which averages 0.41%, according to Morningstar.

More precision

Active ETFs can appeal to investors looking for more precision than passive investments.

“Managers have the flexibility to use their processes, knowledge, research, and tools to determine who they think will be the top performers in a given sector,” said CFP Ashley Folkes, financial advisor and director of marketing and finance Growth strategies at Bridgeworth Wealth Management in Birmingham, Alabama.

Additionally, they can potentially help reduce risk, increase returns, or smooth out volatility, according to Ulin of Ulin & Co. Wealth Management.

As with all active funds, however, performance varies depending on the manager. And some advisors prefer to strictly self-manage their portfolio assets.

“The disadvantage [of ETFs] hunt with a shotgun, not a rifle, “said Harlan Cadinha, chairman and chief strategist of Honolulu-based Cadinha & Co., which ranks 90th on CNBC’s FA 100 list for 2021.

Tax efficiency

Another advantage of actively managed ETFs over mutual funds is tax efficiency.

While ETFs and mutual funds are both baskets of wealth, investors typically get more taxable income from mutual funds due to differences in fund structure and rebalancing process.

When mutual fund managers buy and sell assets, they create capital gains for the investor – including short-term gains that are taxed at less favorable rates – depending on the timing of the transaction.

“You are at the mercy of [mutual] Fund managers take profits in that respect, “said Cadinha.

However, ETF money flows into what are known as “creation units,” which protect everyday investors from the ETF profits when the underlying assets are bought and sold.

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