When we think of exchange-traded funds (ETFs), we often picture those that track major global indices such as the S&P 500 or the MSCI All Country World Index (ACWI).
ETFs are investment tools designed to give investors low-cost access to a wide range of asset classes. Index ETFs, often associated with “passive investing”, are one common example, but they’re far from the only way investors can use ETFs.
As an investment structure, an ETF acts as a “wrapper” that asset managers can use to bundle different types of assets and list them on a stock exchange. This provides three major advantages for investors: liquidity, diversification and price transparency.
With the growing popularity of ETFs, many asset managers have begun launching what are known as “active ETFs” on stock exchanges worldwide. But what exactly is an active ETF, and how does it differ from the traditional index-tracking ETFs most of us are familiar with?
Active Management For ETFs
The term “active ETF” is derived from the concept of “active management” in investing, which is typically associated with unit trusts or mutual funds.
These funds are managed by active-focused asset managers such as JPMorgan Asset Management (JPMAM), Fidelity International, Invesco, and Franklin Templeton, among others. Traditionally, such firms would offer their strategies through unit trust structures, which are commonly distributed via banks or bundled into investment-linked insurance plans.
In recent years, however, many of these asset managers have started offering actively-managed ETFs. These ETFs employ similar investment strategies but are structured as ETFs rather than unit trusts. This shift brings several advantages, including improved price transparency and intraday liquidity, features that are generally absent in traditional unit trusts.
Unlike ETFs, unit trusts are typically structured as “open-ended” funds, which are only priced once a day based on their net asset value (NAV). This limited pricing frequency reduces transparency and flexibility for investors.
Additionally, open-ended funds may face size constraints. If the fund grows too large to manage effectively, the manager may choose to cap new inflows, thereby limiting the fund’s ability to grow its assets under management (AUM).
Key Difference Between Active And Passive ETFs
The key difference between active and passive ETFs lies in how they are managed. Active ETFs rely on fund managers and analysts to make investment decisions to outperform a benchmark index. In contrast, passive ETFs aim to replicate the performance of an index.
This distinction is most evident in their management fees. Passive ETFs – such as those tracking the S&P 500 Index – tend to have significantly lower expense ratios compared to their actively-managed counterparts.
Take, for example, Cathie Wood’s ARK series of actively-managed ETFs, which focus on high-growth technology companies. The ARK Innovation ETF (NYSE: ARKK), its flagship fund, charges an annual expense ratio of 0.75%, relatively high by ETF standards.
In comparison, a passive ETF like the Vanguard S&P 500 ETF (NYSE: VOO) has an annual expense ratio of just 0.03%. This makes ARKK roughly 25 times more expensive to own from a management fee standpoint.
Recent Examples Of Active ETFs
Given the global popularity of ETFs, it’s no surprise that asset managers have begun launching active ETFs accessible to Singapore-based investors.
These ETFs typically follow specific investment strategies designed to outperform a benchmark index. A recent example is JPMorgan Asset Management (JPMAM), which has received regulatory approval to offer three actively managed ETFs to retail investors in Singapore.
Listed on the London Stock Exchange (LSE), these ETFs are structured as UCITS funds – short for “Undertakings for Collective Investment in Transferable Securities”. UCITS ETFs are commonly used in Europe and are considered more tax-efficient for Singapore and other non-US investors.
The three JPMAM active ETFs now available are:
- JPMorgan Equity Premium Income Active UCITS ETF
- JPMorgan Nasdaq Equity Premium Income Active UCITS ETF
- JPMorgan Global Equity Premium Income Active UCITS ETF
These funds are benchmarked against the S&P 500 Index, the Nasdaq Composite Index, and the MSCI World Index, respectively.
What makes them “active” is the involvement of dedicated fund managers and research teams who aim to outperform their respective benchmarks by actively managing the portfolio’s holdings and strategy.
Value In Outperformance
Overall, for investors seeking active strategies, active ETFs offer a more efficient investment vehicle than traditional open-ended unit trusts. This is mainly due to two key advantages: better liquidity and greater price transparency, which is also why more asset managers are shifting towards launching active ETFs.
That said, the real value for investors ultimately depends on whether these active ETFs can consistently deliver outperformance. And this is where the challenge lies. Historically, it has been challenging for active managers to beat broad market indices over the long term.
Read Also: How Much Would You Have Made In The Stock Market If You Started Investing In 2024
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