How an Actively Managed ETF Works

An actively managed ETF is a method of exchange-traded fund with a fund manager or team making plans on the underlying portfolio allocation. Following the name, the fund managers in charge of actively managed ETFs select stocks and made regular trades to generate returns. Actively managed ETF's, often referred to as active ETF's, contains hundreds or even thousands of securities, offering a similar level of diversification expected from other ETFs and mutual funds by investors. An actively managed ETF has several similar benefits to a traditional exchange-traded fund, such as transparency in price, liquidity, and tax efficiency; however, a fund manager can adapt the fund to differing market conditions.

With the combination of active management and an ETF, they provide an innovative solution to asset management to investors. Actively managed ETFs favor investors in various ways, such as lower expense ratios and the chance to acquire benchmark-beating returns. On major stock exchanges, the shares of actively managed ETFs are traded throughout the day, dissimilar to mutual funds, which only trade once a day, after the close of markets. Also, they provide more transparency into their holdings compared to actively managed mutual funds.

It's not definite that a passive-ETF rival will be outperformed by an actively managed fund, though. You can faithfully count on an index to be followed by traditional ETFs, which allows investors to determine the holdings and risk profile of the fund. In line with expectations, this aids in keeping a diversified portfolio. However, fund managers of an actively managed ETF have the free will to trade outside of a benchmark index, making it harder for investors to ascertain the future composition of the portfolio.

Example of an Actively Managed ETF

Actively managed ETF's were born from the battle between ETFs and mutual funds. Investors liked the convenience and benefits offered by ETF's and enjoyed the active maintenance and trading that mutual funds provided. Actively managed ETFs' were the hybrid of both trading strategies.

The most general ETF design tracks a specific index. Nevertheless, you can use ETFs to track the leading selections of an investment manager or a mutual fund. With this method, these ETFs would mirror an actively managed strategy. They would also help to offer high returns.

An ETF tracks a mutual fund; for example, it tends to appeal to regular traders over the mutual fund itself as the outcome of the intraday trading capabilities. There are various examples of actively managed ETFs such as GMTB - Grail McDonnell Core Taxable Bond ETF, GMMB - Grail McDonnell Intermediate Municipal Bond, ETFFWDI - Madrona Forward International, ETFFTSL - First Trust Senior Loan Fund, FWDD - Madrona Forward Domestic ET, and many more.

Index ETFs vs. Actively Managed ETFs

Index ETFs are exchange-traded funds that aim to mirror and monitor a benchmark index. Index ETFs often trade at a modest premium or discount to the fund's NAV; however, any distinction will be rubbed out very fast through arbitrage by institutional investors.

While index ETFs and actively managed ETFs have specific design similarities, they both employ very distinct investing techniques. Index ETFs are passive investment vehicles; this means that the holdings of index ETFs are dependent entirely on the performance of a basic market index. Index ETFs aim to replicate the market index; however, actively managed ETFs use the market index as a yardstick.

Instead of actively managed ETFs to replicate or track the market index, they aim to beat its performance. However, index ETFs have lower costs. One major advantage of index ETFs is their lower expense ratios, as compared to actively managed ETFs.