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Since their debut in the '90s, exchange-traded funds have increasingly gained ground on traditional mutual funds. Total ETF assets under management in the United States topped
There are 19 active ETFs available to retail investors. Experts say there's plenty of pent-up demand for these funds, and they expect the category to grow significantly. "This will be the year of the active ETF launch," says Scott Burns, director of ETF analysis at
Active ETFs look a lot like actively-managed mutual funds. Both are headed by a manager who chooses securities, with the goal of beating a given benchmark index. Some invest in a number of underlying funds, and others have flexible mandates, such as the ability to invest in a range of asset classes throughout the world. But there are a number of differences between active ETFs and actively managed mutual funds, such as how they trade throughout the day and how trading is taxed. Here are a few reasons to consider active ETFs:
ETFs are generally cheaper than mutual funds. According to
ETFs trade on exchanges like stocks, so investors can buy and sell shares of an ETF throughout the day. Mutual funds, on the other hand, are only priced once at the end of each day.
ETFs release a list of their holdings on a daily basis, while mutual funds generally report holdings on a monthly basis. If a fund is only tracking say the
Some managers complain that more transparency could affect their performance. "While investors may want [transparency], that may be a sticking point for many managers," Burns says. If managers are forced to report their holdings every day, it could create a problem called "front-running." That means traders could try to profit by predicting a manager's move. Most experts say these concerns are overblown.
Higher tax efficiency
By design, ETFs are more tax efficient than mutual funds. Essentially, ETF investors don't have to pay taxes on their capital gains until they sell. (With mutual funds, investors may incur taxes when a manager sells securities in the fund.) Investors in actively-managed funds can lose money over the long haul if their fund manager trades on a frequent basis. Granted, passive ETFs will always be more tax efficient than active ETFs because of their low turnover, but Burns says he expects active ETFs to be more efficient than their active mutual fund counterparts, saving investors money over the long term.
Before you dive into actively managed funds, a word of caution: Many have only been in existence for a year or two.
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Investing - The Case for Active ETFs